Here’s Why Baron Funds Initiated a Position in Shopify (SHOP)

Baron Funds, an asset management firm, published its “Baron Opportunity Fund” fourth quarter 2021 investor letter – a copy of which can be downloaded here. An increase of 3.16% was delivered by the fund’s institutional shares for the fourth quarter of 2021 but trailed the Russell 3000 Growth Index, which increased 10.89%, and the S&P 500 Index, which climbed 11.03%. For the full year 2021, the Fund gained 12.29% but underperformed the two indexes, which advanced 25.85% and 28.71%, respectively Spare some time to check the fund’s top 5 holdings to have a clue about their top bets for 2022.

Baron Opportunity Fund, in its Q4 2021 investor letter, mentioned Shopify Inc. (NYSE:SHOP) and discussed its stance on the firm. Founded in 2004, Shopify Inc. (NYSE:SHOP) is an Ottawa, Canada-based multinational e-commerce company with a $97.5 billion market capitalization, and is currently spearheaded by its CEO, Tobias Lütke. Shopify Inc. (NYSE:SHOP) delivered a -43.37% return since the beginning of the year, while its 12-month returns are down by -30.42%. The stock closed at $780.00 per share on March 18, 2022.

Here is what Baron Opportunity Fund has to say about Shopify Inc. (NYSE:SHOP) in its Q4 2021 investor letter:

“During the quarter, as its stock fell to what we believed were compelling levels for longer-term investors, we initiated a position in Shopify Inc., the leading cloud-based commerce software platform. Shopify’s value proposition is to provide a single, easy to use, operating system for merchants to manage every aspect of their business, including selling across multiple channels (direct to consumer as well as on third-party marketplaces like Amazon), managing product listings, inventory, orders, payments, shipments, marketing, and customer relationships.The company has over 1.5 million merchants, who have processed nearly $120 billion of sales during 2020 (and are expected to pass $170 billion in 2021), making Shopify the second largest “behind-the-scenes” e-commerce player in the US behind only Amazon, and ahead of Apple, Walmart, and eBay! Shopify has developed a scalable cloud platform that caters to merchants of all sizes, from a new entrepreneur just starting out to big brands l ike PepsiCo and Unilever. What we really like about Shopify is the ecosystem the company has built, creating network effects and a virtuous cycle that will be very hard for competitors to overcome. The more merchants join, adopt, and transact on Shopify’s platform, the more partners are attracted to its ecosystem, adding more features and options to the platform (through Shopify’s App store), increasing the company’s moats and value to merchants.

The big picture here is that Shopify is quietly building an Amazon competitor. But unlike Amazon, which also competes with its merchants (through first-party sales), Shopify is in the background, quietly helping merchants of all sizes to sell more online, aggregating the scale of the many merchants it has, to enable the benefits that only the largest merchants could get in the past. The opportunity for Shopify is two-fold. First, it is still early in the adoption curve, with the amount of gross merchandise value transacted on the platform expected to pass $170 billion in 2021 out of a $20 trillion-plus market opportunity (global commerce, ex-China), or less than 1% penetration. Second, as Shopify consistently continues to remove hurdles for merchants to sell online, the company can increase its share of the economics (or take-rate) from about 2.6% currently (Amazon charges between 10% and 20% on its fulfillment services). Lastly and perhaps most importantly, Shopify has a great culture, and it is led by a visionary founder, Tobi Lutke. One example of the company’s culture is a blog post from 5 years ago titled “Value Creation – Building for The Next 100 Years” (how many CEOs think, let alone talk about the next 100 years of their company?). The post starts with the following paragraph: “At Shopify, value creation is measured not just by growth of dollars and cents, but also by the growth of small business, computing literacy, and personal development. We are building for the long term.” In our view, Shopify has all the ingredients necessary to become a core holding and we are excited about its long-term potential.”

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Our calculations show that Shopify Inc. (NYSE:SHOP) failed to obtain a mark on our list of the 30 Most Popular Stocks Among Hedge Funds. Shopify Inc. (NYSE:SHOP) was in 86 hedge fund portfolios at the end of the fourth quarter of 2021, compared to 73 funds in the previous quarter. Shopify Inc. (NYSE:SHOP) delivered a -41.06% return in the past 3 months.

In February 2022, we also shared another hedge fund’s views on Shopify Inc. (NYSE:SHOP) in another article. You can find other letters from hedge funds and prominent investors on our hedge fund investor letters 2021 Q4 page.

Disclosure: None. This article is originally published at Insider Monkey.

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