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Shopify – the engine of ecommerce refocusing on its core

Past performance does not predict future returns. You may get back less than you originally invested. Reference to specific securities is not intended as a recommendation to purchase or sell any investment.

In our new series, 'Innovation cash kings of the next decade' we look at the standout companies that are ‘pivoting to profit’ and are at an inflection point of converting customer-driven innovation into shareholder value. This week we take a closer look at Shopify.

This is the first article in the series, you can read the other articles here:

Twilio - delivering the message on profitability

Airbnb: booking beds and profits

Uber's road to profitability

Returning from Silicon Valley in October last year, we were struck by the number of companies we met refocusing their businesses on ‘profitable growth‘ after years of ‘growth at all costs.’ This was a seismic shift in the narrative of management, and a necessary one: 2022 was bruising for technology companies who were faced with the sharpest interest-rate hiking cycle in history combined with a climb down from unsustainable covid-induced demand.

Almost a year on, we are starting to see the impacts of this shift come through in improved operational efficiency. The key question we are now asking is whether ‘pivoting to profit’ sacrifices a company’s ability to grow. Does the customer value proposition remain intact when investment dollars are stripped away?  We believe that innovators who have not just cut costs but are finding more productive ways to achieve similar growth are excellently positioned to capitalise on the new technology cycle we have just entered.

Shopify has taken some of the most dramatic actions across our holdings in the past twelve months to refocus on its core business – being the essential ecommerce infrastructure for merchants. Headcount reductions have been deeper, began earlier and have lasted longer than their peers; inefficient marketing expense has been culled (leading to a 50% payback improvement on paid advertising), R&D has been diverted away from wasteful projects. The company has gone through its operating expenses with a fine toothcomb, taking out 10% in the last quarter alone.

Most spectacular though – underscoring the agility we look for in innovators – was the transformational decision to sell Shopify’s logistics division in May. What was the rationale? Logistics was a side quest, not Shopify’s main quest. This capital-intensive project could not be justified as core. Overnight, the company once again became an asset-light platform with management expecting free cash flow profitability for every quarter in 2023. We expect this number to inflect meaningfully at the turn of the year when logistic capex falls out of the equation entirely.

Has this dented the customer value proposition? On the contrary, these actions have enhanced it. Shopify is now 100% focused on its original mission – to make commerce easier for merchants by becoming their retail operating system. Naturally, we wanted to test the platform’s ease of use ourselves, and so the Global Innovation team set up our very own Shopify store, ‘Innovation Bits & Bobs’, to sell the one mandatory product every Brit needs umbrellas. The whole process was so simple we had to resist the urge to follow through on a career change. For just $39 a month, we were able to set up an online storefront with just a few easy clicks and could instantly sell our umbrellas across multiple channels. Shopify takes care of everything: its single integrated back end allows merchants to source products, manage inventory, process payments, ship orders, access financing and discover buyers, all through one dashboard.

Perhaps more insightful than the ‘review’ by ‘Innovation Bits & Bobs’ is what merchants are telling us about the platform’s value. More and more merchants are joining the Shopify ecosystem, an increasing number are upgrading to Shopify’s enterprise offering, and the fact that the company’s take rate recently hit a record high demonstrates the inherent value of solutions offered to merchants. Revenue is growing at a healthy 30%. Price hikes in April were swallowed with no customer attrition, attesting that the value-to-cost ratio of Shopify’s product is very much from the side of value. This is precisely what we would expect from a company whose playbook is textbook low-end new market disruption.

With the ratio of revenue to operating expenses reset at a sustainably more profitable level, lower capital investment requirements going forwards and a large runway ahead for a company leading the democratisation of commerce, we think that Shopify has turned a critical corner. We have long believed in the power of the company’s compounding machine where it grows alongside its merchants; that growth is now set to be much more profitable.

Understand common financial words and terms See our glossary
KEY RISKS

Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested.

The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.

Investment in Funds managed by the Global Innovation team may involve foreign currencies and may be subject to fluctuations in value due to movements in exchange rates.

Some of the funds may hold a concentrated portfolio of stocks, meaning that if the price of one of these stocks should move significantly, this may have a notable effect on the value of that portfolio. 

DISCLAIMER

This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID), which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.co.uk or direct from Liontrust. Always research your own investments. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.

This should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, forwarded, reproduced, divulged or otherwise distributed in any form whether by way of fax, email, oral or otherwise, in whole or in part without the express and prior written consent of Liontrust.

Clare Pleydell-Bouverie
Clare Pleydell-Bouverie
Clare is a fund manager of the Liontrust Global Innovation, Liontrust Global Dividend and Liontrust Global Technology funds. She joined the team in 2022 and is a fund manager with 8 years of industry experience, having previously worked in global equities at Neptune Investment Management, Liontrust and in private equity research across a variety of industries. Clare holds a first-class degree in history from Christ Church College, Oxford University and is a CFA Charterholder.

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