Today we point the compass toward Santa Claus and head up a few miles to cross the border into Canada, where we find the latest teaser pitch coming in from Motley Fool Canada for their Stock Advisor Canada newsletter… the ad comes from Iain Butler, the Chief Investment Adviser for the Canadian version of the Motley Fool, and in it he promises a stock that “provides instant access to a vast array of internet-based businesses.”

So what is it?

Not so fast, friends, we have to ease our way into it and check out the clues first. Motley Fool Canada typically follows the “pick one or two stocks a month” pattern that is familiar to most newsletter subscribers, though their goal is to choose one pick from Canada and one from the US each month (restricting it to just Canada would make it pretty tough to find great ideas some of the time, and a lot of Canadian individual investors certainly trade in the US, and vice versa).

You’re almost certainly familiar with the Motley Fool, which was founded by the Gardner brothers as an AOL chat room way back in the early 1990s (followed by a UK version in 1998, and versions for Canada, Australia and Singapore over the past five years), and their core Stock Advisor newsletter has a fantastic long-term record mostly because they almost never sell, so their huge winners (like Netflix, Marvel, Amazon, Priceline) are up by several thousand percent, which makes up for all the 80%+ losers that have also been recommended over the years.

That means their newsletters have a lot of fans who bought a few of the top dozen or so stocks they’ve recommended over the years, and some frustrated subscribers who never bought those particular picks but might have picked a few of the 80% losers (I sympathize with that frustration… the best recommendations mostly looked expensive even when they were first recommended, mostly by the David Gardner, and I passed on most of them that were teased at one point or another).

And Iain Butler is trying to build that same kind of record in Canada, though from what I’ve seen they haven’t yet publicized their returns since the letter started a couple years ago — and this Canadian teaser is also a stock that he says has been recommended by David Gardner’s Rule Breakers twice here in the US (that’s the service most folks would call the “small cap growth” letter from the Fool)… so with that, let’s see if we can sift the clues and divine the stock ticker for you.

Butler references Mary Meeker’s annual KPCB “Internet Trends” presentation as a place to look for ideas, which isn’t a bad idea — you can see that presentation here if you’re curious. To me, the big takeaway from the presentation is still, “mobile advertising is an incredible growth market, and Facebook and Snapchat continue to own most of the growth”… but that probably caught my eye mostly because Facebook (FB) is my largest holding, that’s not what Butler’s talking about today.

What Butler’s talking up is a company in e-commerce… here are some of the clues:

“… just in the U.S., according to Meeker’s presentation, there was more than $340 billion spent on e-commerce in 2015, yet this still only accounts for 10% of total retail sales.

“This, Fools, is another trend that’s difficult to see slowing anytime soon. Especially when we consider another generation, Millennials, which has grown up with the internet, is set to increase its spending power significantly over the next decade….

“In our minds however, picking the next Nike or Lululemon out of the current crop of $100 million internet retailers is nearly impossible. For one, many aren’t even publicly traded. More importantly, we’ve no real insight into the wide array of goods and services on offer. It’s too scattered.

“Which is why we’ve been thrilled to add a company to our list of Stock Advisor Canada recommendations (and personal portfolios) that provides instant access to a vast array of internet-based businesses without us having to know a single thing about any of them.

“In our minds, this Ottawa-based company could be the next great Canadian tech story, and even though it just celebrated its 10th anniversary, as indicated by Meeker’s presentation, e-commerce remains in the very early innings.

“This company is not a retailer, although that’s how it started out. It’s a company that determined very early on that the magic was not selling goods and services on the internet, but providing a user-friendly platform for others to do just that.

OK, so we’ve got a company benefitting from the e-commerce tailwind, it’s not that old, it’s from Canada… any other clues?

“… more than 270,000 small and medium sized businesses were paying this company to provide them with the underlying platform….

“Amazon and Facebook have been so enamoured by our Canadian firm that they’ve been quick to strike up a partnership…

“it was our March recommendation… and it’s beating the market since our recommendation.”

So who is it? Thinkolator says this is almost certainly Shopify (SHOP, SH in Toronto), which I hadn’t realized was a Canadian company (I had actually forgotten that it went public, too, so I guess I’m starting to have some trouble with my rememberization). Shopify is a company that started out to be an online snowboarding equipment retailer, realized that the tools available for online commerce (of which there are thousands, from web hosts to site design tools to shopping carts and payment facilitators) were pretty lousy. They built something better for themselves, and realized that selling their online retail solution was probably a better business than selling snowboard equipment.

And yes, if this was the March recommendation for Stock Advisor Canada it is, so far, beating the market — that’s not a meaningful time frame, but the stock is up 14% since March 9, when their March Canadian pick would have been released, and the Canadian market is up about 10% in US$ terms over that time period (the S&P 500 is up about 6%).

They are in an appealing space, with a good business model — they sell a service to small and medium-sized retailers on a monthly subscription that scales with the company, smaller companies might just use their technology to offer a “buy” button and ordering system for their Facebook page for $9 a month, or they might pay $29 for a real online store, or up to ten times that much for a more robust offering that provides more analytics and marketing options. Revenue is driven both by their monthly subscribers and, because they offer a payment processing system and disincentivize the use of alternate payment systems, by the credit card fees that are somewhat comparable to those charged by PayPal or most online “shopping cart” providers.

It’s a very competitive business, and they’re competitive in their pricing but certainly aren’t the cheapest, and Shopify seems to be pretty popular — particularly with those who want a “one stop shop” with very low requirements in terms of required coding or web design skills. They aren’t the only ones who offer an “anyone can do it” online store, but they’re certainly among the leaders. And unlike Etsy or Amazon or Ebay, using Shopify doesn’t restrict you to using a particular marketplace or give up some control of the customer relationship, though Shopify does partner with Amazon and Facebook and probably others in making it easy for retailers to use most big traffic sources for their marketing.

I don’t really know whether Shopify will “win” this market, but it is growing very fast — you can see their latest quarterly press release here, but they’re forecasting that they will end 2016 with between $337 and $347 in revenue, and last year they reported $205 million in revenue, so that’s strong top-line growth of almost 70%. They still think they’ll be losing money, with a GAAP loss of $41-47 million for the year (they’d like to exclude $25 million of it for their stock-based compensation costs, but even with that it would be a loss).

With that kind of growth, they could probably make a profit this year if that were their focus — 70% revenue growth, if their margins remain the same at about 55% (they might not, it depends on whether more of the revenue comes from higher-margin subscription payments or lower-margin services like payment processing), would give them gross profits of $180+ million… if they could get those kinds of revenues by only growing their operating costs by 40%, they’d be in the black. That probably won’t happen, as they indicate in their forecast, but it’s a possibility over the next couple years if things continue as they are — they have slowed down the rate of growth of their operating costs (that’s selling and marketing costs, R&D, overhead, etc.), which makes sense because it should be a very scalable business, the engineers who make sure the system works don’t have to work quite twice as hard if they have twice as many customers using the system. The projection of $41-47 million in GAAP losses for 2016 means they’re not expecting to become much more efficient, that would mean that margins for 2016 will be similar to 2015.

Which makes sense — the reason they went public, after all, was the raise their profile and raise some money that they could use to take market share and build the company and the brand. They still have $150 million in cash or thereabouts, so they can afford to push growth for a couple more years before they have to be particularly concerned about margins — and since a shopping cart offering is very sticky, their client retention should be very high. They ought not to be losing customers, except for the customers who just stop selling — as I’m sure you’re aware, small and medium-sized businesses go out of business quite often — and the few customers who get too big to think it’s reasonable to pay Shopify’s fees and have the cash to invest in building and maintaining their own systems.

All of which gets to the conclusion that it seems like a reasonable business, with a strong tailwind as more people shop online and more small online businesses are started, but that should be weighed against the fact that though their retention should be quite good for the customers they already have, customer acquisition will probably continue to be expensive and challenging in the face of strong competition from other players, some of whom are, though not public, fairly large and well-funded by venture capital.

The free articles on Motley Fool Canada occasionally mention Shopify as well, they posted a free article here that sums up why they think 2016 will be a “fantastic” year for the company, and the Fool’s US site posted a pretty good article about their latest quarterly results here.

I find SHOP’s growth compelling, their forecasts for the year provide a pretty strong degree of confidence, and I like the stickiness of their relationships with their customers… I’m even pretty OK with the fact that they’re losing money at this point, since margins are gradually improving and there’s a clear return on investment as long as they can make good decisions in the future and dial back their expenses fast enough as their growth rate slows.

What worries me is the competition from other established e-commerce providers like BigCommerce, WooCommerce, Magento, etc., even though Shopify seems to have a pretty “top of mind” position in that group, and I would also worry about the possibility that small changes from large companies like Google, Facebook or even Amazon could quickly damage the business in ways that are hard to predict. We saw that with Demand Media (DMD), for example, in the internet content space… one quick change from Google in ranking their search results, and what you thought was going to be 30% revenue growth forever turns into annual declines and a slow erosion of the business.

That’s not a fair comparison, probably, since DMD was mostly a junk business, but it’s important to remember that almost all internet companies (Stock Gumshoe included) rely in part on the whim of the algorithms at Facebook and Google. The leaders at the top don’t change that quickly once they’re firmly entrenched, I think we probably assume too high an obsolescence risk for gigantic “ecosystem owners” like Apple, Google, Facebook and Amazon since this seems to be a world where there are natural monopolies and “one winner” businesses… but the smaller players who live at the feet of the giants can see their circumstances change quickly when the giants shift position.

That’s just my quick opinion after skimming through their financials, though, I don’t know a lot about the inner workings of Shopify, or how they’ve built their business… I just know that it’s almost certainly the pick that Stock Advisor Canada is teasing, and, well, with that I’ll leave you to it — go forth, researchify, and let us know what you think with a comment below.

Disclosures: I don’t own Shopify shares, but I am invested in Facebook, Apple and Alphabet/Google. I won’t trade in any covered stock for at least three days per Stock Gumshoe’s rules.