In a world where anyone can sell anything to anyone, Shopify might be the most important company you’ve never thought much about.

It’s not just the website builder for millions of merchants; it’s the scaffolding behind the global shift in how products are sold, brands are born, and ideas are commercialized.

Founded nearly 20 years ago by Tobi Lütke to sell snowboards online, Shopify has grown into the software layer enabling millions of merchants to build their brands, run their operations, and participate in the global digital economy.

With nearly $300 billion in Gross Merchandise Volume (GMV) processed in 2024 alone, Shopify now touches roughly 10% of all e-commerce sales in the U.S., and that number is climbing fast.

Today, we’ll dive into Shopify’s evolution, breaking down how it earns money, its relationship with Amazon in the battle for the future of e-Commerce, and its valuation — as always, we’ll also decide whether the company deserves a spot in our Intrinsic Value Portfolio.

— Shawn

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Shopify: Democratizing E-Commerce

The Internet’s Invisible Storefront

Most readers, at some point, have made a purchase through a Shopify-powered site and had probably no idea. That’s the point.

Shopify is happy to remain behind the scenes — Its ambition isn’t to become the next Amazon, but rather, the rails beneath every independent store that isn’t Amazon. Many brands don’t sell on Amazon and are instead powered by Shopify, which underpins their virtual storefronts, processes transactions, and assists with order fulfillment, on top of many other services that we’ll get more into.

Not to say that no brands sell through their own website (which may or may not be powered by Shopify) and also through Amazon, but really, the point is that Shopify and Amazon have long embodied starkly different visions for what the future of e-commerce can look like.

Where Amazon wants to pull brands onto its marketplace, commoditizing their offerings and the checkout experience to maximize simplicity and value for customers, Shopify wants to help merchants stand on their own, empowering e-commerce enterprises of all sizes to seamlessly and independently run their businesses.

To understand Shopify, though, you have to rewind to a humble Canadian snowboard shop in 2004, and a developer who was too stubborn to sell his gear on eBay.

From Snowboards to APIs

Tobi Lütke didn’t set out to build one of the most important internet companies of the 21st century. He just wanted to sell snowboards.

He tried using existing platforms like eBay and Amazon, but hated how inflexible and controlling they were. So instead, he used his programming prowess to build his own e-commerce store and found out that others wanted to use the software, too.

With that, Shopify was born.

That instinct — to build infrastructure instead of compete on the surface — became the company’s entire ethos.

Shopify would go on to power millions of stores around the world. And yet, it’s likely you’ve never noticed when you’ve bought from one of them. Shopify deliberately takes a backseat, empowering merchants to build their own brands rather than inserting its own.

There’s something quietly radical about that approach. While Amazon controls the buyer relationship and absorbs the customer experience into its own ecosystem, Shopify flips the model: the merchant owns the brand and the experience. Shopify just makes it all work.

That philosophy is what allowed Shopify to scale and why so many merchants trust it. And boy, has its growth been dramatic:

Shopify’s Business Model in Two Buckets

So we’re all on the same page, let’s quickly discuss how Shopify makes money, which comes in two primary ways: subscriptions and add-ons called “merchant services.”

The first is exactly what it sounds like: merchants pay a monthly fee to use Shopify’s software. That can range from $39 per month for a Basic plan, all the way up to more than $2,000 per month for Shopify Plus, as Shopify has increasingly scaled up to accommodate larger enterprises after initially targeting small & medium-sized businesses.

On that note, over 35,000 large brands subscribe to Shopify Plus, driving 55% of the company’s gross merchandise value (GMV). That’s a very high-quality base for recurring subscription revenues.

The second bucket is where things get interesting.

Merchant Solutions includes payments processing (via Shopify Payments), logistics and shipping (more on that later), point-of-sale hardware for physical stores, and the fees Shopify earns from its App Store. In just a few clicks, Shopify enables merchants to do things like process payments in multiple currencies and even sell across markets around the world. Running an e-commerce business has never been easier.

While Subscription revenue is relatively predictable, it’s Merchant Solutions that captures the upside of Shopify’s model, growing as merchants grow their businesses.

This means Shopify’s revenue is, at least in part, transaction-linked. When its merchants do well, it does well. When e-commerce booms, Shopify booms.

In 2015, Merchant Solutions made up 45% of Shopify’s revenue. Today, it’s more than 70%, transforming the nature of Shopify’s business from one that is more conservatively tied to recurring subscriptions to being anchored in the huge and growing market opportunity that e-commerce represents globally.

What’s key to understand here is the take rate Shopify captures from facilitating commerce — how much of every dollar in gross merchandise value (GMV) Shopify turns into revenue. As of the most recent results, Shopify’s take rate through merchant solutions is north of 2% — meaning for every $100 sold on a Shopify store, you might say the company captures roughly $2 in revenue, and more when you bake-in subscription revenues.

That 2% might sound small, but the numbers add up fast.

And it’s not just growth in GMV that matters (as in, facilitating more commerce for more merchants), Shopify’s take rate has been steadily increasing over time.

As Shopify has offered more and more add-on services for merchants to take advantage of, the more it has diversified its revenue streams and generally increased its take rate, at least for the Merchant Solutions segment.

The increasing take rate tells a deeper story: Shopify is monetizing its ecosystem more effectively. It’s not just providing software anymore; it’s capturing more value from the payment layer, the app ecosystem, and its newer tools like Shopify Capital.

The (Short-Lived) Logistics Experiment

For a while, Shopify’s biggest existential question was this: Can it compete with Amazon?

Not as a retailer, but as a logistics company. The answer, it turns out, was no.

In 2022, Shopify spent $2.1 billion to acquire Deliverr, a last-mile logistics company that was supposed to accelerate its fulfillment network supporting merchants’ order processing. The idea was bold: offer two-day shipping to any Shopify merchant, and level the playing field against Amazon Prime.

A year later, Shopify pulled the plug. It sold off its entire logistics division, including Deliverr, to a company called Flexport, suffering a nearly complete loss on its initial investment. In Shopify’s incredible success story, this was a glaring oversight and, truthfully, a very poor allocation of capital.

Why the sudden pivot?

Shopify realized that logistics was too capital-intensive, too operationally complex, and too far outside its core competency. It wanted to return to being an asset-light platform business, not a capital-heavy logistics provider like Amazon.

It’s rare for a company to reverse a major strategic move so quickly. But in hindsight, it was commendable to do so. They opted not to double down on a bad bet, pulling back to refocus.

Today, Shopify still helps merchants with shipping and fulfillment, but it does so through partnerships with Flexport, and it’s back to doing what it does best: building software infrastructure.

Shopify Capital, Apps, and Ecosystem Lock-In

You might say Shopify isn’t just a digital storefront builder. It’s a platform and, increasingly, a financial platform.

One underrated piece of the business is Shopify Capital, which provides short-term funding to merchants. Shopify uses machine learning to underwrite loans and advances based on real-time merchant data, and takes repayment directly from merchants’ future sales.

In 2023, Shopify advanced over $5 billion through Shopify Capital, which is a burgeoning part of Shopify’s larger merchant solutions business.

The beauty of this model is that it deepens Shopify’s relationship with the merchant.

Shopify isn’t just hosting their store; it’s literally funding their growth with services like Shopify Capital, helping them hire, buy inventory, and scale. That’s not the only piece of the ecosystem that makes Shopify’s service incredibly sticky.

There’s also the Shopify App Store that we’ve already alluded to. Imagine that, in the same way you can download apps on your phone that allow you to, well, do more things, that’s exactly what Shopify’s App Store does, too, allowing merchants to download apps and plug-ins built by third-party developers that will enhance their business in one way or another.

There’s a network effect here, where Shopify provides the storefronts for enough businesses that they can attract independent developers to come and build tools for Shopify merchants to utilize. And as the intermediary facilitating it all, Shopify can charge fees as high as 20% for every transaction that occurs in its App Store.

For example, apps in the Shopify App Store promise to power everything from email marketing to inventory tracking, complementing Shopify’s own offerings and allowing merchants to more fully customize their storefronts while also boosting conversion rates and average order sizes. Some apps are as simple as embedding countdown clocks for shopping customers.

And in Shopify’s Theme Store, merchants have full control over their site design.

The more tools a merchant adopts, the harder it is to leave. 90% of Shopify merchants, for example, rely on Shopify’s payment processing, which allows them to accept any debit or credit card.

That lock-in is subtle but powerful. Once a business is up and running on Shopify, with apps, themes, capital, payments, and maybe even POS hardware, the switching costs become enormous.

Those switching costs, and to a lesser extent, the network effect behind its App Store with 16,000+ apps, combine to form a powerful moat around Shopify’s earnings.

International Expansion (and Opportunity)

If Shopify is going to continue compounding at the rates it has, it will need to grow more internationally.

The company already serves merchants in 175 countries, but much of its GMV is still concentrated in North America.

That’s starting to shift: International merchants accounted for over 30% of Shopify’s total revenues last year. And Shopify has been rolling out key features — like local payment methods and multi-language support — to better serve global sellers.

This is about unlocking the long tail of merchants globally, many of whom are mobile-first, social-first, and skipping the traditional retail playbook.

If Shopify can become the go-to platform for merchants in places like India, Brazil, and Southeast Asia, where e-commerce penetration is dramatically increasing, the upside is enormous.

Still, Shopify touches just 10% of e-commerce in the U.S., so there’s room to continue growing everywhere, as the e-commerce pie generally gets bigger and bigger, which leads us to the elephant in the room…

The Frenemy: Shopify vs. Amazon

You can only talk about Shopify for so long before asking the question: What about Amazon?

From the outside, it might seem like the two companies are locked in a winner-take-all battle. Amazon is the Goliath of e-commerce with nearly 40% market share, and Shopify is arming the Davids. But the reality is more nuanced, and in some ways, they even partner together.

Shopify and Amazon have always had a complicated relationship, one that’s evolved from competitive tension to something closer to strategic coexistence.

Early on, Shopify was explicitly positioned as the anti-Amazon. Tobi Lütke made it clear that Shopify’s mission was to give merchants control over their brand, their customer data, their pricing, and their experience. That was a direct contrast to Amazon’s marketplace, where sellers are just one of many, seemingly competing in a race to the bottom (products at the lowest possible prices).

But over time, Shopify realized something important: many of its merchants also sell on Amazon. And more importantly, Amazon isn’t going anywhere. Also, Shopify can’t exactly beat Amazon at certain things, like logistics, which it found out the hard way with its failed acquisition of Deliverr.

While it’s easy to fall in love with the story of Shopify and its very promising business prospects, Amazon has periodically reminded markets that it reigns king, shaping the direction that Shopify goes in. We saw this with Shopify’s logistics pivot, but also, when Amazon decided three years ago that it wanted a bigger slice of e-commerce, recognizing that it couldn’t bring all commerce onto its platform.

Three years ago, Amazon unveiled its “Buy with Prime” initiative, blurring the lines between where Amazon competes and where Shopify competes.

The new initiative meant that any merchant (not just those selling on Amazon) could tap into Amazon’s logistics and Prime promise, without giving up the front-end experience or customer relationship. Any brand with its own website, whether powered by Shopify or not, could integrate a “Buy with Prime” button, allowing them to access Amazon’s incredible fulfilment network in exchange for a 3% service fee.

For Amazon, it’s a way to extend its fulfillment network beyond its walled garden, touching more commerce and potentially turning Amazon into the logistics provider for nearly all e-commerce in North America and beyond.

While Shopify’s management tried to play down the development, this was a warning shot across the bow, signaling Amazon’s intent to change its strategy and leaving Shopify on the back foot. After initially trying to block Shopify merchants from using Buy with Prime, Shopify capitulated — again, and has since made peace with the new status quo, allowing Shopify merchants to utilize Amazon’s fulfillment network through Buy with Prime.

For Shopify, it was a way to offer merchants a best-in-class shipping solution, without re-entering the logistics game themselves.

In some ways, it was a truce. Bulls might argue it was classic Shopify: let others do the hard stuff, and own the software infrastructure layer that ties it all together, while bears would argue that Amazon has shown that when it wants to, it can flex its muscles and completely upend Shopify.

And the reality is that there’s a degree of tacit understanding between the two companies. There are plenty of merchants like Allbirds, for example, that use Shopify for their DTC storefront while also selling on Amazon, tapping into Amazon’s massive marketplace and all the customer traffic that comes with it (even if that does mean higher fees for merchants and less control over the customer experience).

For many merchants, Amazon and Shopify simply make up separate channels in their broader distribution, and with Amazon’s Buy with Prime being integrated into Shopify, the lines between them are blurring.

Valuing Shopify & Portfolio Decision

Let’s talk valuation, the thing that is ultimately in the back of our minds as investors, as we think through the business.

Shopify’s stats are off the charts. Revenue growth over the last decade has averaged 56% per year. And yet, with that kind of growth, the company is quite profitable, too, with a 22% net income margin (more than twice Amazon’s profit margins).

Amazon has caused Shopify to moderate some of its ambitions, but Shopify still has a lot to be excited about.

There are many more merchants who don’t yet use Shopify than who do, and many of them could surely benefit from streamlining their operations with an all-in-one platform like Shopify. So, I (Shawn) have no doubts that Shopify is, and will continue to be, an incredible business.

The frustrating reality, though, is that this is no secret. At nearly 75x its expected earnings per share for 2025, only the most raging of bulls could argue the stock is cheaply priced. By all measures, the market is paying a massive premium for Shopify, expecting it to continue growing at around 30% per year going forward.

Now, I can get as excited about Shopify as anyone, but I don’t like to invest in companies where the risk-reward is so dramatically skewed in one direction (not in a good way). A recession, for example, would be painful for Shopify, as merchants may go out of business, hitting subscription revenues, while e-commerce transactions also decline, hurting the merchant solutions business — a double whammy.

So any economic hiccups, or any other bumps in the road from managerial mistakes (in case they didn’t learn their lesson with Deliverr), could cause the stock price to be dramatically revalued, leaving a ton of downside to be had whenever a company trades at such a rich multiple of current earnings. That potential downside has only increased today, as the stock has leapt 30%+ since I first began researching it over a month ago.

Shopify’s business is sound, but its stock is highly speculative, and so while I pitched Daniel on it, we are both in agreement that now is not the right time with Shopify. My intrinsic value buy price target is approximately $53 for Shopify, and at the time of writing, shares are trading at more than double that, so I don’t expect to be adding Shopify to the Portfolio anytime soon.

There is, of course, a fair price to be paid for rapid expected future growth. According to the Graham & Dodd P/E Matrix (yes, that Graham — Ben Graham), you might pay a 75x earnings multiple for a company you expect to grow 40% per year over the next five years, if triple A corporate bonds yield roughly 5% (they currently yield around 5.5%).

The higher that yield, the higher your present opportunity costs, and thus the lower multiple you should pay for future growth.

Point being, at 90× 2024 earnings, Shopify is trading at an implied earnings growth rate of well more than 40% per year, following the wisdom of Ben Graham. Again, I can get bullish on Shopify, but not that bullish. This is probably more than double what the median Wall Street analyst is projecting for Shopify’s growth.

If you expect earnings to grow at closer to 20% per year over the next 5 years (still fast but a slowdown relative to its own history), then you might pay around 40x earnings — less than half the current price, in line with my model’s price target.

Perhaps if we get some more tariff-induced turmoil or a more lasting bear market, we’ll get the chance to buy Shopify at a more attractive multiple.

As always, you can access our valuation model for Shopify here (hit “file” and “download” to make your own assumptions), and you can go deeper on Shopify by listening to our full podcast here.

Weekly Update: The Intrinsic Value Portfolio

Notes

• We remain a bit suspicious of the broad market averages — stocks have been, or were before Friday, recovered from their tariff-induced losses, yet tariffs haven’t entirely been rolled back, and these partial rollbacks are also broadly temporary, so there seems to be some wishful thinking and/or willingness to disregard the risk of higher tariffs remaining broadly in place (or even new ones being added after comments from the White House on Friday.)
  

  • With this rally over the last month, many of the stocks we follow have moved away from the levels where we find them most attractive.
    

• One company remains at relatively attractive prices: Nike. Directionally, tariffs seem to be moving the right way for Nike, but with the stock down 18.5% year-to-date and more than 30% over the last 12 months, we think there’s still a considerable amount of pessimism and fear baked into the shares. It has bounced a bit since the tariff lows, but given how disproportionately impacted they would’ve been by very high tariffs on Vietnam and China, this is probably a fair pricing of Nike’s prospects (not overly optimistic) and, if anything, probably reflects some caution given that it hasn’t jumped higher.
  

  • Because we continue to think that, even though Nike has made some major strategic missteps previously, it’s on the right path and has the resources, relationships, athlete partners, and creative talent to reinvigorate its brand over the next 5-10 years, we see the stock as attractively priced. And while it has moved above our initial entry price, the case for our worst-case tariff fears seems likely to be averted, too.
    

  • After further reflection on the strengths of Nike’s brand and global reach, and after chatting with industry sources on the magnitude of Nike’s advantages, we decided to increase our position sizing of Nike from 1% to 2% at a price of approximately $60 per share, and may continue to add to it if the stock dips back toward $55 per share. This is still a small relative position, but it reflects our growing confidence in the long-term prospects of Nike’s earnings power.
    

  • I (Shawn) have warmed up a bit to Nike, and while I still wouldn’t pound the table for it, I can see the opportunity in making a modestly-sized bet on them turning things around.

Quote of the Day

"If you believe something needs to exist, if it's something you want to use yourself, don't let anyone ever stop you from doing it. To me, a great company starts with a great product and ends with a great product.”

— Tobi Lütke

What Else We’re Into

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