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Motley Fool: Shopping for Shopify

Satish Kanwar, vice president of product, discusses  Shopify's new retail hardware, the Shopify Tap & Chip Reader, at Shopify's annual partner conference in Toronto on Tuesday, May 8, 2018. (SHOPIFY)
Satish Kanwar, vice president of product, discusses Shopify's new retail hardware, the Shopify Tap & Chip Reader, at Shopify's annual partner conference in Toronto on Tuesday, May 8, 2018. (SHOPIFY)

Shopify (NYSE: SHOP) helps more than 600,000 businesses sell their products online. It offers more than 100 website templates to help customize the experience, and it can provide services such as invoicing, order tracking, payment processing and shipping integration, too. The recurring revenue that’s generated should help Shopify prosper for years to come.

Shopify has been so successful catering to the needs of small- and medium-sized merchants that it has added enterprise-level options for larger companies, which tend to spend more than their smaller counterparts. It’s also focusing on international growth, as currently most of its customers are in the United States.

The company has chosen to forgo profits (for now) in exchange for a rapid expansion (its second-quarter revenue soared 62 percent over year-earlier levels). That’s not uncommon for young and fast-growing companies, and increasing sales and more recurring revenue should eventually deliver earnings. Meanwhile, Shopify’s stock price has soared more than 700 percent over the past five years.

Management forecasts revenue of about $1 billion for the full year, which would be a 48 percent jump over last year. With its massive international opportunity and the paradigm shift to e-commerce that is just getting started, Shopify is a promising portfolio candidate for risk-tolerant long-term investors. (The Motley Fool owns shares of and has recommended Shopify.)

Ask the Fool

Q: If a company has a return on equity above 100 percent, is that good or bad? – E.M., Rochester, Minnesota

A: It requires a closer look. Return on equity reflects the productivity of the net assets (assets minus liabilities) that a company has at its disposal. It’s determined by dividing net income by shareholder equity. (Net income is found on a company’s income statement, while shareholder equity is found on the balance sheet and is what you get when you subtract liabilities from assets.) In general, the higher the ROE, the better.

Note, though, that some ROEs are artificially high because the company has taken on a lot of debt or has bought back a lot of shares. These actions shrink shareholder equity, driving up ROE.

Q: What’s “the accrual method”? – S.L., Maryville, Tennessee

A: It’s one of many accounting concepts worth learning to help you understand companies’ financial statements.

In the accounting world, “revenue” (sales) doesn’t necessarily represent the receipt of cash in a sale. Many companies are required to book sales when goods are shipped or when services are rendered. But others can record sales when cash is received, or incrementally, as long-term contracts proceed through stages of completion. With the accrual accounting system, the revenue on a company’s income statement may not have actually been received by the company.

Imagine, for example, PieMart Inc. (ticker: GOBBL). With the accrual method, if it has shipped off a thousand pies but hasn’t yet been paid for them, those sales still appear on the income statement. The checks in the mail are reported as “accounts receivable” on the balance sheet. (When receivables are growing faster than revenue, that can be a sign of trouble.)

My dumbest investment

My dumbest investment was in Sierra Wireless, which fell from near $50 per share to the mid-teens, costing me a lot of money. – B.B., online

The Fool responds: When investing, it’s important to remember that not every investment will play out as you expect or hope. Even the best investors regret some of their moves.

It’s also critical to understand that no stock will move up in a straight line. There’s always some volatility, and it can be especially so with young companies and ones in fast-changing industries. As long as you maintain long-term faith in a company, it’s often best to just hang on.

Sierra Wireless, in the business of making wireless chips and modules that are used in wearable devices, connected vehicles, smart cities and more, topped $30 per share about nine months after you wrote us, but it was recently in the teens again, though seemingly heading up.

It’s focused on the promising Internet of Things market, which enables items such as cars, health care devices and even home appliances to communicate using Bluetooth and cellular signals.

We can’t know how Sierra Wireless will perform in the future, but there’s plenty to be hopeful about. Its shares surged 19 percent recently, when it posted strong second-quarter results, featuring revenue growing 16 percent year over year and bullish projections from management. (The Motley Fool owns shares of and has recommended Sierra Wireless.)

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