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Why Shopify Could Keep Rising

Shopify Inc (NYSE:SHOP) has further upside, in my view, after its 200% gain in the past year.

The e-commerce services business is introducing innovative new products, increasing its investment in international markets and expanding its shipping services.

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Shipping services

Shopify's launch of its Fulfilment Network in fiscal 2019 could catalyze its financial performance. Its Fulfilment Network offers affordable shipping services to the merchants that use the company's other services through leveraging Shopify's size and scale.

The company reported in its fiscal 2019 fourth quarter results that its Fulfilment Network has resonated with merchants. It could provide the company with an additional source of income and may encourage its merchants to become increasingly dependent on its range of services. This may lead to a more robust financial outlook for the business.

The company's acquisition of 6 River Systems in fiscal 2019 could increase take-up of its fulfilment services among its existing merchants. 6 River Systems specializes in automated shipping services that could further reduce fulfilment costs and increase shipping reliability for Shopify's merchants. This may help Shopify's merchants to more easily compete with their larger sector peers, and could increase the attraction of the company's range of e-commerce services.

Innovation

The company released new products and services in fiscal 2019 that could strengthen its competitive position. For example, it launched new online marketing services that included chat and email functionality for its merchants. It also used its partnerships with Facebook (NASDAQ:FB) and Microsoft (NASDAQ:MSFT) to offer a greater variety of online advertising opportunities to its merchants. They could help its merchants to reach a larger number of potential customers without having to leave Shopify's platform.

In addition, the business released new products that are designed to increase the in-store sales of its merchants. They included its Tap & Chip Reader, which makes in-store card payments faster and simpler for its merchants. It also plans to launch a new update for its card payment system in fiscal 2020, which it expects to be faster and more reliable compared to its previous version. This may encourage a greater range of online and offline businesses to use its services in upcoming quarters.

Possible challenges

The company's financial performance could be negatively impacted by increasing competition within the e-commerce services sector. Companies such as Facebook and Adobe (NASDAQ:ADBE) offer similar e-commerce services to Shopify through their Instagram and Magento products, respectively.

This may lead to Shopify being required to reinvest significant amounts of its profit to differentiate itself from its sector peers. It may also mean that the company is unable to rapidly increase its margins through raising the prices it charges to its merchants. This may limit its capacity to deliver rising profitability over upcoming years.

In response, Shopify is seeking to expand the availability of its services to international markets. For example, it increased the range of languages that its products are translated into in fiscal 2019.

It also entered into partnerships with marketing companies in a wider range of countries to provide its merchants with more effective local marketing tools. This contributed to the company's international merchants making up 29% of its total merchant base in 2019, compared to 24% in 2018. A further increase in the geographic diversity of the business may reduce its overall risk and allow it to access fast-growing markets across the world.

Outlook

Market analysts forecast that the business will report a profit in fiscal 2020 after its loss in fiscal 2019. They then expect Shopify to record a 76% rise in its earnings per share in fiscal 2021, which could catalyze its stock price following its recent gains.

Disclosure: The author has no position in any stocks mentioned.

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This article first appeared on GuruFocus.