🧠 Does Shopify Have A Moat?

Friends,

Shopify reported earnings two weeks ago and shares have popped 40% in the ensuing days.

The jump wasn’t without reason: the company announced it was exiting the logistics business (delivering packages to your front door), and doubling down on its core technology (the websites you order stuff from).

Running a logistics business is complex and capital intensive. By contrast, software is much easier to manage and does not require a lot of capital. It’s no surprise that investors were happy to see Shopify adjust their focus.

But we think next quarter will be the real test of our long-term thesis.

That’s because next quarter’s numbers will reveal just how strong Shopify’s moat — or sustainable competitive advantage — really is.

The moat: High switching costs.

If you set up your internet business on Shopify — use it to host your site, track your orders and customers, handle payment — you’d need a really, really good reason to deal with the headache of switching to a competitor.

In April, a really good reason arrived.

Shopify enacted a fairly large price increase in its monthly subscription rates. Mind you: this was the first such increase in a long time. But still, it gives merchants a chance to reconsider sticking with Shopify.

If Shopify has a moat, customers won’t leave. If it doesn’t, they’ll flee in droves.

How will we know if they do stick with Shopify? Subscription revenue will grow faster than it has in the past (10.7% in the most recent quarter) and subscription gross margins should be wider (78.0% on a GAAP basis).

This is one of the many benefits to being able to read financial statements: it allows you to translate numbers into a narrative that can help you make better investing decisions.

It’s no wonder why Buffett has repeatedly called accounting “the language of business.“

Wishing you success in all your endeavors,

– Brian Feroldi, Brian Stoffel, & Brian Withers

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August 20th 2022

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