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This Tech Stock Looks Like the Next Shopify (TSX:SHOP)

Ryan Vanzo
Modern skyscrapers in business district

Everyone is trying to find the next Shopify Inc (TSX:SHOP)(NYSE:SHOP). That’s because Shopify stock has increased in value by 15-fold since 2015. In just four years, $10,000 would have turned into $150,000.

If you want to mimic these results, pay attention. While there are many possible candidates, there’s only one way to accurately predict the next Shopify: you must understand exactly what makes Shopify so special. There’s more to the story here than high growth rates. Let’s dive in.

Here’s the secret

Everyone knows that Shopify is growing like a weed. In 2015 and 2016, revenues rose by around 90% per year. This breakneck speed has come down a bit, but last year, the company still increased sales by more than 50%. This year, revenues are expected to top $2 billion. In 2020, they’re set to approach $3 billion.

The question you should be asking is this: What’s Shopify’s secret?

While the company does many things exceptionally well, its success is largely a function of platforming. You’ve likely heard of the term platform before, but what does it mean in practice? Given that many companies are claiming platform status today — even though they’re far from it – it’s especially important to understand this term.

A platform is exactly what it sounds like: an infrastructure on which other things can be built. Your computer’s operating system is a platform because all of your software and applications run on top of it—they need the operating system in order to function.

When done properly, platforms create huge networks of applications that all require it to survive. That creates huge switching costs, embedding the platform into every activity.

Shopify has been incredibly successful at platforming. Anyone, anywhere can use Shopify to launch an e-commerce site in minutes. From there, they can add payment processing, inventory management, advertising, and dozens of other capabilities.

These features are built on top of the Shopify platform. If you want to change platforms, you’ll lose all of the functionality and capabilities that you’ve designed your business around. This becomes a self-reinforcing cycle—users are incentivized to stick with the platform, aggregating huge amounts of users, which in turn attracts developers to build even more on top of the platform, attracting yet more users.

The next Shopify

To find the next Shopify, you need to find the next platform. Fiverr International Ltd (NYSE:FVRR) looks like a great bet. While Shopify sports a $60 billion market cap, Fiverr is being valued at less than $1 billion. Over the next few years, it has the opportunity to increase in size by 10-fold following the Shopify template.

Fiverr runs an online marketplace for freelancers. This is a market that should grow for the next decade and beyond. Increasing numbers of workers are looking to go freelance. In the U.K., 67% of workers are considering going freelance.

In the U.S., Deloitte estimates the number of self-employed workers to hit 42 million by 2020. As well, a growing number of businesses are looking to tap the flexibility and cost advantages of a freelance workforce.

Fiverr, which is headed by Wix.Com Ltd veterans, is looking to become the go-to place for freelance gigs. By aggregating both supply and demand early, it has the ability to establish platform status akin to Shopify. Fiverr Studios, for example, allows freelancers to combine skills with one another to create virtual agencies overnight.

This feature is built on top of the Fiverr platform; thus, there are huge incentives to stick with the Fiverr platform once the team becomes successful. Sound familiar?

The company is growing at breakneck speed, but few have caught on. This year, it should generate $102 million in revenues. Next year, analysts forecast $132 million in sales. The following year, sales should approach $160 million. This 20% to 30% annual growth rate should be sustainable for years.

Despite rapid growth, shares trade at just 6.5 times 2019 sales. Shopify, for comparison, trades at more than 28 times 2019 sales. Fiverr isn’t the only stock with the potential to become the next Shopify, but it looks like a compelling bet.

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Tom Gardner owns shares of Shopify. The Motley Fool owns shares of Shopify and Shopify. Shopify is a recommendation of Stock Advisor Canada. Ryan Vanzo has no position in any stocks mentioned.

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