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Here's Why You Should Be Bullish on Shopify

Sunk by allegations it was little more than a get-rich-quick scheme, Shopify (NYSE: SHOP) had a rocky end to what was, until that point, a stellar year. It's been trading in a fairly predictable range since then, but as we start 2018, it's time for investors to get bullish on its stock, because it may be ready to resume its meteoric growth.

The force behind the scenes

Shopify is an e-commerce platform provider that helps small and medium-sized businesses establish web-based and mobile storefronts by giving them a simple, seamless, and secure platform from which to sell their goods and services. The crux of the allegations against it, published by noted short-seller Citron Research, was that Shopify was violating various FTC marketing guidelines that made it "dirtier than Herbalife" and that it was overvalued.

Image source: Getty Images.

Since then, there has been considerable pushback from Wall Street analysts and Shopify customers who say the accusations were off base. Though Shopify's own public defense against the charges were somewhat ineffectual, it let its business do the talking.

Ahead of the unofficial start to the Christmas holiday season, Shopify opened up new sales channels on Facebook's Instagram platform and on eBay. Then, over the four-day Black Friday to Cyber Monday period, more than 500,000 merchants in 175 countries sold over $1 billion in gross merchandise volume, with more than $1 million worth of transactions in just one minute being generated at the peak.

Shopify noted mobile sales outpaced desktop sales for the third straight year, representing 64% of all sales made, a 10% increase from 2016. Furthermore, mobile sales on Cyber Monday grew to 60% of the total, an 11% year-over-year increase.

In the third quarter, revenue surged 72% higher, hitting $171.5 million, as its subscription business saw a 65% jump. These numbers suggest that rather than the sketchy outfit Shopify was purported to be, it is a platform delivering real value to small and medium-sized businesses.

In the express lane for growth

The e-commerce platform provider has demonstrated consistent revenue growth over the past few years, as sales surged more than 90% in 2016 following a near-doubling the year before. Analysts are forecasting revenue to grow another 70% this year, followed by 45% growth next year.

Although that represents a slowing of its expansion rate, it's difficult to expect exponential growth of any business to continue indefinitely. It still has plenty of room to grow as there are few, if any, competitors on the market that offer its unique portfolio of services to small-business owners.

Online shopping is still the fastest-growing portion of the retail market, and many of these upcoming businesses will turn to Shopify to digitize their operations and get them going. E-commerce sales grew to over 9% of total retail sales in the third quarter, and could very well exceed 10% in the fourth after the strong Christmas holiday many retailers reported.

More profits to come

There's no question Shopify trades at some lofty valuations while still reporting losses, similar to Amazon.com, which for years reported large losses but still saw shares run much higher. Of course, every money-losing business likes to paint itself as the next company to replicate the e-commerce king's results, but most fail. Shopify may not.

Last quarter it reported adjusted operating income of $1.7 million, profits that came sooner than management anticipated, and Shopify will likely report further adjusted profits for the fourth quarter and end the year in the black.

With little competition, a growing base of customers, a successful platform, and an immense target market that will increasingly need its services, the setback that Shopify suffered by what many feel was a spurious attack should end up being a blip on the screen when investors look back on its history. As the economy continues to improve, there's every reason for them to be bullish on Shopify's potential from here.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends AMZN, EBAY, FB, and Shopify. The Motley Fool has a disclosure policy.

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