Baron FinTech: “Shopify (SHOP) Will be a Prime Beneficiary of the Secular Growth of E-commerce”

Baron Funds, an investment management firm, published its fourth quarter 2020 “Baron FinTech Fund” investor letter – a copy of which can be downloaded here. A return of 13.61% was recorded by its Retail Shares, and 13.67% by its Institutional Shares in the fourth quarter of 2020, both below its  FactSet Global FinTech Benchmark that delivered a 21.35% return but above its S&P 500 index that was up by 12.15% in the same period. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.

Baron FinTech Fund, in their Q4 2020 investor letter, mentioned Shopify Inc. (NYSE: SHOP) and emphasized their views on the company. Shopify Inc. is a Ottawa, Canada-based e-commerce company company that currently has a $142.4 billion market capitalization. Since the beginning of the year, SHOP delivered a 2.65% return, impressively extending its 12-month gains to 170.23%. As of March 23, 2021, the stock closed at $1,162.00 per share.

Here is what Baron FinTech Fund has to say about Shopify Inc. in their Q4 2020 investor letter:

“During the quarter, we initiated a position in Shopify Inc., a provider of commerce and payment solutions for merchants of all sizes. Over one million merchants around the world use Shopify’s software to run their businesses through E-commerce websites and apps, physical retail locations, social media storefronts, and marketplaces. The Shopify platform addresses many of the challenges of running a retail business, such as selling across multiple channels, managing inventory, processing orders and payments, fulfillment, shipping, and accessing capital. Shopify’s solutions operate in the cloud, enabling faster product innovation and the ability to provide unique data insights to merchants about demand, pricing. and shipping optimization. The platform integrates with over 5,000 apps from third-party providers, creating two-sided network effects as the large number of merchants attract more partners and vice versa. About half of the company’s revenue comes from FinTech solutions, including processing payments, lending, and business banking services.

We expect Shopify will be a prime beneficiary of the secular growth of Ecommerce. Gross merchandise volume on the Shopify platform was $100 billion over the last 12 months, which is large but still only 5% of global online sales and 0.5% of global commerce sales (online and offline) excluding China, implying a very long runway for growth. We expect Shopify’s sales volume to grow faster than the e-commerce market due to  an expanding set of capabilities, geographic expansion, and a singular focus on helping merchants succeed. We expect Shopify to better monetize the sales volume on its platform by increasing penetration of its payments, lending, business banking, and fulfillment services. Shopify’s take rate and operating margin should meaning fully expand over time as the company provides additional solutions to its merchant customers.”

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Our calculations show that Shopify Inc. (NYSE: SHOP) does not belong in our list of the 30 Most Popular Stocks Among Hedge Funds. As of the end of the fourth quarter of 2020, Shopify Inc. was in 90 hedge fund portfolios, compared to 81 funds in the third quarter. SHOP delivered a -9.01% return in the past 3 months.