Shopify Inc. helps cannabis firms sell their products

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Cannabis-Connected

Merchants of all sizes gain from this Canadian firm’s software for designing, setting up and managing online selling. Among them are a number of prominent cannabis producers and provincial government retailers. 


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SHOPIFY INC., $433.61, symbol SHOP on Toronto (Shares outstanding: 116.9  million; Market cap: $50.7 billion; www.shopify.ca), offers merchants of all sizes Internet-based software to design, set up and manage stores across multiple sales channels. They include both permanent and temporary retail stores, but also web, mobile and social-media platforms.

The software gives merchants a real-time snapshot of their entire business, including inventory, shipping and payments.

The company charges monthly subscription fees of $29 to $179. It also charges for each credit card transaction: With the $179-a-month unlimited plan, the fee for each transaction is 2.25% + $0.30. That’s on top of the regular credit card fees the merchant already pays.

Shopify continues to attract more merchants to its platform. As a result, its revenue in the three months ended June 30, 2019, jumped 47.8%, to $362.0 million from $245.0 million a year earlier. (All figures except share price and market cap in U.S. dollars.)

Excluding one-time items, the company made $15.8 million, or $0.14 a share in the quarter. That beat the consensus forecast $0.02. The latest earnings are also up 520.1% from $2.5 million, or $0.02 a share, a year earlier.

The company’s balance sheet is strong: it holds cash of $2.0 billion and has no debt.

To boost sales outside of the U.S. and Canada, the company is launching more seamless international currency transactions and support for users in more languages.

In addition, cannabis growers and retailers continue to choose Shopify’s software and services to help manage their operations.

For example, the British Columbia government selected Shopify to provide an e-commerce platform for the online sale of non-medical cannabis. The B.C. Liquor Distribution Branch will be the sole wholesale distributor in the province, although its retail locations will compete with private sellers. Shopify created two separate websites to fulfil online orders: one for consumers, where the age of the purchaser will be verified, and the second for public and private retail stores. Couriers also verify the age of buyers at delivery. At-store pickup of online orders is still under consideration. The B.C. distribution centre for orders will be located in a 6,500-square-metre facility in Richmond.

The Ontario Cannabis Store (OCS), a subsidiary of the Ontario Liquor Control Board, also uses Shopify’s e-commerce platform to power its online cannabis website. While the government of Premier Doug Ford continues to issue permits to private retailers to sell cannabis, OCS will still be the only online seller of cannabis, at least for now.

Among licenced Canadian cannabis producers, Canopy Growth, Aurora Cannabis, Hydropothecary Corporation and Hexo Corp., have signed e-commerce deals with Shopify.

The company’s contract wins with marijuana growers and retailers—including governments—represent only a small part of its current revenue. However, industry contributions to revenue and earnings should continue to rise after legalization given the company’s leading software and services.

Shopify’s experience in Canada will also give it an edge as other countries begin to legalize cannabis. For example, it recently added new features to its e-commerce platform that would make it easier for U.S. merchants to sell hemp and hemp-derived cannabidiol (CBD) products in states where cannabis is legal. CBD is a non-psychoactive compound extracted from both marijuana and hemp.

We think Shopify shares have room to rise. Meanwhile, though, the stock trades at a very high 544.2 times the forecast 2019 earnings of $0.60 U.S. a share.

Shopify is a worthwhile hold.

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