Earnings Roundup: Facebook, Amazon, and Shopify

Tons of tech companies have released earnings in the past few weeks. In this episode of Industry Focus: Tech, host Dylan Lewis and Motley Fool contributor Brian Feroldi talk through the truly staggering top-line growth numbers from the tech titans and discuss why everything seems to be coming up aces at Shopify.

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Dylan Lewis: It’s Friday, April 30th, and we’re talking three Fool favorites that just reported earnings. I’m your host, Dylan Lewis, and I’m joined by fool.com’s two time treasure trove trailer of tracking talk about to be top tech titans, Brian Feroldi. Brian, how are you doing?

Brian Feroldi: Dylan, I saw the fist pump when you nailed that title. Way to go, congrats. That was a tricky one.

Lewis: Feel like Tiger at the Masters. [laughs] That was an achievement in and of itself, Brian. I always love to talk […] gave me. That one was particularly tough because of all the hyphenation but I made it through, I made it through. Brian, how are you doing?

Feroldi: I’m doing great. I’m glad you’re showing your professionalism there. [laughs] You’ve really come a long way, Dylan.

Lewis: I’ve just found with this, you got to let the people in. You’ve got to give them a look behind the scenes. Because if not, what are we doing? We’re honest, we keep scores, Fools, but I think we also show cracks and all when we’re doing everything we’re doing.

Feroldi: You got it. We’re imperfect people for sure. For this week’s show, Dylan, we had a bazillion tech titans to talk about potentially. We really had to narrow down the list to just three that really wowed us.

Lewis: I know. If this were an hour long program or a two hour long program, Brian, I think we would have still had plenty to talk about. In fact, we’re an embarrassment of riches really when it came to earnings reports. Earnings season is always one of the most fun times for us because we talk about it all the time. But you really get four updates throughout the year that gives you a sense of the direction of the business and whether the thesis that you originally bought a company for is holding, and that’s when you get the quarterly reports. Outside of that, largely market noise and that’s why we pay so much attention to it. They tend to come in blizzards. You tend to get a lot of them in the same week or two.

Feroldi: Especially faster than anything about this earnings season, and I’d argue that next earnings season is when we’re lapping the COVID comps. For some companies, COVID was a massive tailwind. For others, a huge headwind. Largely for these tech companies, it was mostly a headwind, although many of their growth did slow. So the year-over-year numbers that some of these companies are going to report really across the board are going to be quite amazing. The bar is set pretty high for a lot of these businesses.

Lewis: Yeah, and that is the give-and-take of some of these special one-time events that gives you something really incredible in some ways to report the tailwind for you for a couple of quarters, but then you’re going to be lapping those results at some point and then ultimately you’re going to have to live up to those numbers […]. Brian, really one of the big things we were talking about in the early part of 2021. I remember we did a show looking out over the year and thinking through what’s on our radar thematically, what are we thinking about investing in the tech space? One of the big things we were coming up against was, how are companies going to do now that they are lapping these massive step changes in their business where more and more stuff is being pushed digital. Basically what we’ve seen, the results from most of these businesses that we follow is, no real issues here. Things are just cruising along and they haven’t had any trouble keeping up with the comps except for themselves.

Feroldi: Yeah, we’re going to get into the numbers specifically, but pick any big company, Apple, Microsoft, Google [Alphabet], three of which companies we’re not talking about, but all of them just produced stellar results. So the numbers that we’ve seen thus far this earnings season are impressive.

Lewis: Yeah, and we intentionally chose the three businesses that we’re talking about today, Facebook, Amazon, and Shopify, because we know they’re Fool favorites. A lot of people follow these businesses. Wanted to give their earnings some airtime because we imagine they’re in a lot of people’s portfolios. I, at one point, have owned all three of these stocks. I now own two of them. I sold out my Facebook shares in 2020, Brian. Hit my boiling point where I was like, I can’t do this anymore. But that has not proven to be a great financial decision, although it has helped me sleep a little bit better at night.

Feroldi: Fair enough, Dylan. Know thyself and I will continue to own Facebook for the both of us.

Lewis: You have plenty of good reasons to do so. I think if you look at the business, everything is up into the right and as massive as they are and then we’re going to have a very similar conversation when we talk about Amazon. They continue to find growth, and it’s baffling to think at the scale that they’re operating on, the size of the denominator they’re working on. They’re still able to find growth in all of these different categories, all these phenomena to their business.

Feroldi: Yeah, so let’s dig into the numbers. Last quarter, Facebook reported 8% growth in its daily active users to 1.88 billion. Monthly active users grew 10%, so even faster to 2.85 billion. That’s basically half of humanity and the majority of the people that have had access to the Internet are Facebook users. Facebook recently started reporting a new metric called daily active people, which gives a more nuanced look where they basically estimate how many people are, if multiple family members are using the same account to give them an actual sense of how many eyeballs are on there. That’s called family daily active people. That grew 15% to 2.72 billion and family monthly active people grew 15% to 3.45 billion, and that’s just people. If you look at the number of businesses that are now on Facebook, that number now exceeds 200 million. This company’s scale is unbelievable.

Lewis: I think it’s good to highlight that businesses now on Facebook, because we have to remind ourselves with a company like Facebook, they’re the customers. Really, when it comes to making money, the more businesses that are on there, the more people that are buying ad spots, the better it is for Facebook as a business. The users are the monetizable activity, and you want to see that up into the right as well. But such a huge part of Facebook’s roadmap over the last, say, five to eight years has been getting businesses, particularly small businesses, where hyper targeted local advertising is really relevant and really important for them as part of their marketing strategy onto the platform, and they’ve done a remarkable job of doing that.

Feroldi: They really have. We’ll talk some a little bit more later about WhatsApp and what’s been happening there because the company is making tremendous success there too. But let’s dive into the numbers a little bit. Total revenue for this company grew 48% to $26.2 billion. For comparison, Wall Street would have accepted $23.7 billion. So this was a huge beat on the topline. The rest of the income state looked even better. Gross margin ticked up to 80%. Expenses only grew 25% across-the-board. That was significantly lower than revenue growth. As a result, the company reported a 94% jump in net income to $9.5 billion or $3.30 per share. Wall Street was looking for $2.37 per share. Pick a number, it looks great.

Lewis: I love the way you broke that down, Brian, because it’s a great run through of the income statement, but also a really good way to explain the inputs and how different growth affects the flow of money as you go down the income statement, right? So we had a big 48% figure on revenue. You see that gross margin and what ultimately flows down to net income expands because expenses didn’t grow as quickly. That’s really nice operating leverage for Facebook to be able to enjoy.

Feroldi: That’s a tricky concept to grasp your head around, operating leverage, and it’s essentially when your costs are growing at a slower rate than your revenue. As we saw here, Facebook’s revenue grew 48%, but with operating leverage kicking in, net income grew 94%. That’s why when we talk about gross margin and margins across-the-board, that’s why they matter, because they can drive operating leverage.

Lewis: It’s stunning to think that a company that size can enjoy that type of bottom line year-over-year growth. It’s really remarkable. When a company of that size has that cash on hand, it gives them a lot of flexibility and lets them do a lot in terms of capital allocation, Brian.

Feroldi: Yeah, and even during the quarter, they returned some money to shareholders, they bought back $4 billion worth of stock. This company is based in Silicon Valley, so they dole out stock options like crazy. So the share count was actually up slightly year-over-year. Their buybacks are mostly going to offset dilution, but I think it’s a good thing that they’re using that capital. When it comes to that topline bit, it’s important I think, to point out just how they did that. Management said that they saw a 30% year-over-year increase in the average price per ad and a 12% jump in the number of ads delivered. Remember that their average daily active users only grew 8%. So that means that the average user is seeing slightly more ads, but advertisers are willing to pay much more for those ad placements. That’s how you combine that to 48% growth.

Lewis: Yeah, and that’s a particularly strong number and an important breakdown because it really speaks to the efficacy of the ads on the platform. It’s something that bodes well for them long-term because to a certain extent, you only have so much ad inventory that you can lay into the platform. Otherwise, you’re going to over saturate people with ads and it’s going to turn into a bad user experience. I think Facebook has been very deliberate over the last five or so years, thinking about how much ad inventory they can really bring on into the news feed, into the homepage so that it doesn’t interfere too much with how people use the site. If the prices keep climbing, even if they hit that point where they’re not really able to put very many more ads in, they’re still going to be able to enjoy growth simply on the user base they have. If they can add users as well, that’s where you get two different levers working in your favor.

Feroldi: Yeah. That’s almost like the dollar-based net retention rate in a similar way that we talk about for a lot of SaaS companies. It’s essentially, how much more revenue are you getting from your existing customer base, and it’s hard to know how high that number can grow, but it has grown considerably. If you talk to a lot of marketers, they do say that Facebook ads work, so there is no better sign of that being truer than that number we just talked about.

Lewis: I’ll say, just knowing The Fool, it’s a major acquisition channel for us when we’re talking about bringing in members to some of our services. I get to talk to our marketers internally and basically say, “Where are they coming from?” More often than not, it’s Facebook. It’s a very valuable place and the ROI is there and that’s why we see that price continue to shoot up.

Feroldi: With 3.5 billion family monthly active people, it’s likely that dollars will continue to flow there too. On the call, Zuckerberg went into details on three big areas that he is really keen on that would drive this company’s next phase of growth. He called those out as augmented reality, commerce, and business messaging. On the augmented reality side, it’s very clear that Facebook is taking the AR and VR market extremely seriously, and they are really a leader in the space right now with their Quest 2 product they had just launched. Zuckerberg noted that it’s growing much faster than expected, and they are continually investing in that platform. They’ve plans for neural interfaces for interacting with AR, they’ve got a new avatar system that really lets their users express themselves. They launched a new ecosystem that broadens the number of apps that are on there beyond games, and there are even talk about productivity and fitness apps. They noted that they launched FitXR to do boxing and dancing, to do VR on there similar to Peloton. Facebook and Zuckerberg are very serious about augmented reality.

Lewis: This is something that’s been playing out for a long time. It’s easy in the grand scheme of everything that Facebook does to forget about the AR and VR ambitions, and forget about that Oculus acquisition that they made what feels like so many years ago, just in the lifetime of this company. They spent a little over $2 billion to make that deal happen. I think a lot of people at the time were like, “This is a hardware business. What are you doing? How can we justify this, especially when the sales weren’t really there to back up that valuation?” I think something like that only makes sense if you have a multi-year roadmap for working that in, and you really feel like it’s going to be part of where you go long term. That’s where $2 billion feels like a steal for an acquisition instead of paying up for something that honestly doesn’t have the financial support to support it.

Feroldi: I think of it as a low-risk bet that Zuckerberg made where he believes that the next computing technology is going to be AR and VR, and Facebook wants to be the company that is the hardware maker of them. If for no other reason that they’re currently in a well big dispute with Apple, and with Apple really pushing the privacy functions of their next roll out of the iOS, that is going to be a potential headwind for Facebook. If Facebook can own or be the Apple of VR, they might not have to deal with that problem with the next launch, so you can’t blame this company for not thinking long term.

Lewis: Really, if you’re thinking about the migration of users and where they’re consuming content, you go back 10 years, everything was desktop. Mobile was this massive question mark for companies that were ad-based like Facebook and like Google. There were a lot of concerns about mobile ad rates, the efficacy of online ads, whether advertisers would see the ROI. That was a really big thing that Facebook had to overcome, and it’s easy to forget that now that it’s close to a trillion-dollar company. But that was a major question mark for this business. If you’re thinking out maybe next year or the following year, you’re not going to see a massive shift from people going from mobile to AR or VR. But if you’re thinking five, 10, 15 years, it’s not crazy to think that we’re going to start seeing more and more content consumption, more and more activity in those places.

Feroldi: Yeah, and there’s no guarantee that that’s going to happen. It’s possible that no matter how great AR and VR technology becomes, consumers just won’t adopt it. But if they do, as of right now, Facebook does look like the leader in that space and the one to catch up to. That will be something that’s fascinating to watch. On the rest of the call, Zuckerberg did note that they are making big time investments into commerce. They did note that their marketplace business gets one billion visits each month and their shops business has one million active shops and over 250 million shops. They noted that WhatsApp now allows businesses to upload their entire catalogs so that users can go in there and see what products they have in stock. They also have over 100 million messages per day going back and forth between businesses and consumers. As a shareholder, I’m happy to see that because I have just completely mentally written off WhatsApp as a eventual zero. The numbers that we’re seeing so far suggest that maybe, [laughs] this actually could have been a good acquisition.

Lewis: I remember looking back at some conference calls that Facebook management did, it was probably a couple of years ago, and they outlined their philosophy when it came to monetization platforms. It’s basically like, create a really great user experience, create spaces for businesses to hop online, create organic interaction between users and businesses, and then layer in monetizable activity. I think for a long time, people have wondered with the messaging apps, Facebook Messenger and WhatsApp in particular, when this started to materialize into actual money for the business because there was a pretty hefty price tag tied to that WhatsApp acquisition. I think it was about a $22 billion acquisition if I remember it correctly. It makes the Oculus acquisition seem cheap, and they acquired a lot of users with that, particularly in a global sense. WhatsApp is massive, especially outside the United States. But how do you justify that price tag? I think, Brian, the marketplace approach, the e-commerce approach, makes a ton of sense if you have a really big installed base of users.

Feroldi: It really does, and they are noting that they’re having success with advertisers. They have more than three million advertisers that are using WhatsApp click to message, they’re bringing payments to it, which is now live in India, and India is a huge market for WhatsApp. The ultimate case here would be that WhatsApp becomes like the WeChat of India or the rest of the world. I wouldn’t count Facebook out from doing that so that is a big potential upside that this company has embedded in it.

Lewis: I think it would be easy to discount them as messaging apps, but we talk so much about what optionality can create for business is, and when you have an in-storm base of, I forget exactly what the number is for WhatsApp.

Feroldi: It’s a lot.

Lewis: It’s either in the hundreds of millions or it might even be in the billions, it might be over one billion, I think, at this point. But when you have that and you have people that are engaged with an app, with a product all the time, you can say, “You know what, we’re going to see if we can layer a payment functionality into this. We’re going to see if we can give businesses the ability to stand, to shop up.” That’s where it goes from being a messaging app to being something so much more. It becomes the operating system really for how you engage with commerce and socially. They certainly have the potential for that Brian, because they have the critical mass of users.

Feroldi: You got it. That will be a story to watch moving forward, but there’s no doubt that this report was just fantastic. While the company doesn’t give exact guidance, they did note that they say they expect revenue in the second quarter to be stable or modestly accelerate over the growth rate in the first quarter aka, it looks like the company is saying, “We’re going to report 50% revenue growth next quarter.” In the third and fourth quarter, they’re going to be going up against some tougher comps as well as the new launch of iOS 14.5 is going to be kicking in, as well as some other regulatory and platform changes. They’re calling for much more modest growth in the back half of the year. But when it comes to just looking at this earnings report, fantastic.

Lewis: Absolutely fantastic. The numbers look great and we’re starting to see Facebook flirt with that $1 trillion market cap figure, Brian. We might have a new entrant to that club pretty soon if the number stays strong.

Feroldi: Getting close and I would not count the company out from getting there.

Lewis: They have a little bit of a way to go to catch up to our next company though and that’s Amazon, one that I’m sure a lot of Fools own. I think one of those earnings reports I look at, Brian, and I say, “I don’t understand how a company this big can put up these numbers.” It defies the way that my brain works, honestly. We saw 44% topline growth to over $108 billion this quarter. For a company that has been around this long operating in a lot of the markets they have been so long, it just shows how strong the tailwinds are. It’s so easy for us to forget how little e-commerce penetration actually is in the grand scheme of retail when you see these growth numbers, that really highlights that.

Feroldi: That is an enormous number, both of those numbers. First 44% revenue growth and then in $108 billion quarter, incredible. This company has long trailed, a company like Walmart in just terms of quarterly sales, but wow, is it rapidly catching up? Walmart is still the king of quarterly reports in terms of pure revenue. Last quarter, Walmart reported $152 million, but Amazon $108 million. With that growth rate, they’re catching up fast.

Lewis: The further you go down the income statement, the more impressive the growth rates get, because operating income more than doubled year-over-year to just under $9 billion for the quarter and net income more than tripled year-over-year to $8 billion. A lot of that is not necessarily the e-commerce operations that they have, though, of course we know that the ecosystem for them is so important than having over 200 million paid prime members globally. But really, the story here is the maturation and the continued growth of this cash cow business for them, AWS.

I want to highlight this quote from Jeff Bezos around the earnings results, “Two of our kids are now 10 and 15 years old and after years of being nurtured, they’re growing up fast and coming into their own.” Those two children he is talking about, we have AWS and Prime Video, I think two things that it’s been hard to read anything about Amazon in the last couple of years and not hear AWS get invoked. This is their Cloud infrastructure business and it’s become a $54 billion annual sales run rate business, Brian, in just 15 years, $13 billion in revenue for the quarter, which is up 32%. They have dominated the Cloud infrastructure space. There are other players coming into this market and I think starting to eat away a little bit of their market share, but this is one of those incredibly high-margin businesses for them and there are just so many tailwinds pushing it forward.

Feroldi: It would be fascinating for me to see how big Amazon Web Services would be if it was spun out into its own business. I mean, you’re talking about a company with a $54 billion annual run rate growing at 32% with high-margins. What kind of price to sales will the market [laughs] put on that? I mean, it’s not inconceivable that that business alone would be $1 trillion.

Lewis: Yeah. I think it’s helpful to look back at Amazon before this. I think Bezos got a little sentimental there and talked about the 15-year maturation process for this business, but if you go back to the mid-odds, a pre-AWS Amazon. See you had a company that had gross margins in the low 20%, operating margins in the low single-digits and you basically, Brian had an online retailer, I mean, by all accounts and by looking at the books, you had an e-commerce business set to look an awful lot like conventional retail. Low-margin some interesting growth because of the e-commerce approach, but ultimately not the most compelling business in a lot of ways aside from the growth story. You go to today, Amazon has 40% gross margins, so just under double and 7% operating margins. It is a much more interesting business because of that. To get there, we talk about this all the time, but I think businesses in transition can be ugly.

We talk about it a lot with the transition from being a traditional software provider to being a SaaS provider, but I think you look at the books for Amazon, it’s another good illustration of this. It would be easy to think, Brian, that everything was up and stood right with Amazon and AWS, not the case. They had to endure lower operating margins from 2011-2017, even though their gross margins were climbing that entire period. The reason for that was their R&D spend continued to go up as a percentage of revenue, basically doubled from 2010-2014. That translated into inconsistent income. They wound up posting losses in some years and now I think we can look at it in 2021, say 100% the right decision, because if you look at the operating income, AWS is half of the pie for this company.

Feroldi: Amazon, over the last 10 years to me is the ultimate example of when, if you just look at the P/E ratio, you can miss so much about the story here. Everything that you just said just shows that Amazon was purposely keeping its profits extremely low because it was reinvesting like crazy into AWS, into Prime, and it’s with other ventures. As a result, it’s net income was nil for basically 10 or 15 years and all along the way, Amazon stock was going up. It was very easy for anybody to say the PE ratio here is just insane. It makes no sense to pay 100, 200, 300 times earnings for a stock like this. But that’s when it’s so important to dig into the details and look at things like the gross margin, look at where they’re putting their investments and have the vision to see, yes, margins are low right now, where could they be in a couple of years? Amazon is a great example of that.

Lewis: Yeah. It’s that classic you have to pair what you’re seeing with the numbers, with what management is saying about where they are putting money and decide for yourself whether those things make sense. Because just look at Enbridge, like what is going on with this business? [laughs] Why are they shoving all this money into things. All their other core metrics are suffering because of it. They went out and found probably one of the most important tailwinds they could over the last five years and crucially just gave themselves a cash cow. For a segment like this that is so much smaller than their e-commerce operations to contribute so much to their operating income, it’s incredibly helpful. It gives them all this cash they can invest in other parts of business. Yes, R&D was probably a really big cost line item for them in scaling this business up, but it was 100% worth it.

Feroldi: It totally was. What’s even more equally impressive is not only do they just report fantastic numbers, they expect to continue reporting fantastic numbers. For the quarter ahead, the company is diving for revenue growth of between 24% and 30%. It’s possible the company could be sandbagging yet again there. This is a company that is currently trading at an all-time high and closing in on $2 trillion. When you dig through the numbers, it deserves it.

Lewis: It’s easy to understand why. I did a little bit of a look back. This was an episode where I decided it would be helpful to have historical context both with AWS but also with the valuation in the growth rates that we’re seeing from the likes of Facebook and Amazon. You go back to like the mid-90’s when tech wasn’t as dominant in the S&P 500. Companies like General Electric were generally the largest components of the S&P 500. They were not growing at 24%-30% [laughs] year-over-year. In then a lot of cases they were in like the mid-teens, sometimes the high-teens, and sometimes down to single-digits. I think what is so hard about these businesses, and we’re not even talking about Apple, but I think they posted +50% year-over-year growth as a nearly $2 trillion company. You have businesses that are historically big, posting historically impressive growth. It throws out the window the idea that this company is too big to put up good shareholder returns going forward.

Feroldi: As we said pick any tech type we just talked about, the numbers that they’re posting is crazy, crazy good. It is completely understandable why these companies have gotten so big, and why they continue to trade at premiums to the overall market. They are very, very high-quality businesses that continue to grow despite their gargantuan size.

Lewis: Yeah. I’m sure there are going to be some folks out there that look out for the rest of 2021 and say, what does an Amazon without Jeff Bezos look like? Is Amazon’s Web Services CEO Andy Jassy going to be taking over? I don’t think you have to look too far in this conversation. We just mentioned Apple to see that there can be very successful transitions from the visionary leader to another player that has a demonstrated track record and rewards shareholders along the way. Apple has been a fantastic investment during the Tim Cook era. There are so many things to continue to like about Amazon as an investment, even if Bezos isn’t at the helm as CEO and is more in that executive chairman role that they’ve outlined.

Feroldi: That to me is a transition that is easy to swallow. Yes, he’s not the CEO anymore, but he’s still involved in all of the big time decisions and I love that at Amazon, they promoted from within. Apple did the same thing, promoting from within. Satya Nadella, promoted from within. Think of someone that knows the culture and just drives it to the next phase of growth. Amazon is one of my biggest holdings. I have zero issues with Jeff Bezos not being the CEO any more.

Lewis: All right, Brian, from the mega caps of tech to possibly a future mega cap of tech. The final stock that we’re going to be doing an earnings breakdown is Shopify, one near and dear to a lot of Fools’ hearts. Not a small company by any stretch, I think it’s about $150 billion business, but a long way from the $2.2 trillion for Apple, the nearly $2 trillion for Amazon, and the nearly $1 trillion for Facebook.

Feroldi: We’re going from gargantuan tech, to what used to be called gargantuan tech. Yeah, this is a $150 billion business, Shopify. As great as the two reports that we just talked about were, this one takes the cake, no doubt. Everything in Shopify’s report looked great. Gross merchandising volume, A.K.A. the total volume that flowed through Shopify’s platform, grew 114% to $37 billion, gross payment volume through Shopify platform grew 137% to $17.3 billion, revenue here grew 110% to $989 million. By comparison, Wall Street was looking for $865 million, a substantial beat on the topline. When you dig into that a little bit more, you see that subscription revenue was up 71%, those are those recurring payments that its customers make just to be on the platform. But merchant solutions revenue, which are like one-time optional payments based on volume, that was up 137% to $668 million. Topline looked fantastic.

Lewis: Those are some darn impressive growth rates and it’s hard to know which are going to be more exciting: the GMV or the GPV, because those are two very, very interesting business lines for them to be in. We talk about it a lot. We just talked about it with Facebook, but the idea of e-commerce digital payments, it’s a really compelling thesis. We’ve seen so many companies do really well in that space and I’ve loved everything that I’ve seen from Shopify so far on the fintech investments. I only expect that part of their business to become more and more important as the years come along.

Feroldi: Totally, and Shopify is clearly killing it on that front. The good news there though, is the rest of the income statement looked equally as impressive, gross margin was up 200 basis points to 56.6%. Adjusted net income was $254 million or $2.01 per share. That was up more than tenfold over the prior year, and Wall Street was looking for just $0.73, so a massive beat. One side note that I thought was funny was that, if you look on a GAAP basis, Shopify’s GAAP net income during the quarter was $1.26 billion. As a reminder, the company’s revenue was $989 million, so it reported more GAAP net income than it did revenue. The reason for that is the company reported a $1.3 billion unrealized gain on its equity investment that it made in a firm. But man, those numbers look great.

Lewis: That’s why it’s helpful to read the context, Brian. Because a year out from now someone is going to be looking at the bottom line for Shopify. Say what happened? Why were they flat year-over-year? Why were they down year-over-year? That’s where you see that these one-time things can play a role and windup messing with the numbers a little bit. That’s why it’s always helpful to do a little bit of digging. That’s why we only put so much into these year-over-year comps because we always have to make sure that we’re looking at things on an apples-to-apples basis.

Feroldi: You got it. Now, on the call, Shopify called out a number of things that I think investors should be excited about. First and foremost, they are investing heavily into their Shopify fulfillment network, which is again becoming like an Amazon-like storage facility that handles all of the pain in the butt things about running a shop. They also launched a new in-app buy button for their mobile shopping assistant shop, which now has over 107 million registered users, 24 million of which use the product every month. Shopify also released a documentary, I was unaware of this, called Own The Room, which was produced in part with National Geographic. That actually premiered on Disney+ and highlights a couple of its merchants that are having particular success. Point about the fintech success, Shopify Capital, that’s its lending arm, grew its lending by 90% to $309 million. It also launched some new card readers in an all-new point-of-sale service in the U.K. and its partnership network, it’s eco-ship ecosystem network of partners that refer business to Shopify, that grew 73% to more than 45,000. Pick a number, sounds great.

Lewis: It all looks good. Yeah, there are a couple of things that I want to drill into on that. I think the capital thing is particularly interesting to me because when I hear Shopify getting deeper and deeper into fintech, it’s one of those things that just makes sense. In the same way that Square, getting more involved in providing capital to businesses, makes sense. They have an incredible lens into payment activity and the financials for customers on their platform. Why wouldn’t they try to leverage that to make life easier for those businesses and create new business segments themselves?

Feroldi: It just makes complete sense as what you said, as you guys mentioned, they have the data, they know how their merchants are doing. They can automate a lot of those decisions, and a lot of the loans are very short term in nature. Sometimes, they have to make payroll or to fulfill inventory of needs. They’re pretty low-risk loans. But I love the optionality that Shopify has, where it’s willing to invest in these businesses and if they hit, they can grow and they could become substantial contributors down the road.

Lewis: Yeah, the other thing I want to hit on Brian is those registered users that you pointed out. I think we typically tend to think of Shopify at least the last couple of years. It’s been more of something that is behind the scenes. If you look quickly at the URL with some businesses, you might see that it’s powered by Shopify or some of the site elements might tip you off that they are powered by Shopify. But I don’t think there’s a lot of consumer awareness around Shopify right now. I have thought for a while that there might be something there for them and it seems like they are exploring that a little bit more.

Feroldi: Yeah, they really make investments into that app, and apps are a natural extension because that’s where consumers can go to find businesses that they might not find elsewhere. Again, this isn’t like Amazon, where Amazon.com is your destination and third-party sellers fulfill it. You are going mostly to that third party seller directly, so it’s up to that third party seller to direct traffic and do all their marketing. Shopify shop app could help to facilitate some of that and leverage their brand name, which is definitely growing in importance. I like that they’re making investments there.

Lewis: Yeah, it’s an interesting space. We’ve seen a lot of businesses very successfully push demand within ecosystems that they create or find ways to monetize demand. Whether it be through ads, being through placements, partnerships, all that stuff. It is just another interesting lever for them to pull at some point if they’re able to build a critical mass of users, because then that becomes a really interesting audience for all of the businesses that they help.

Feroldi: You got it. If you like optionality, Shopify has that in spades and has for a long time. Now, when it comes to guidance, management is expecting “rapid revenue growth” in 2021, but at a lower rate than 2020. I think that’s completely fair. Yes, there were probably a lot of new accounts that were pulled forward into 2020 that would’ve come in 2021. Same thing we’ve seen with companies like Netflix, for example, where demand just simply got pulled forward, but the company still plans on growing its top line at a pretty high level and signing on a record number of merchants, except when compared to 2020. It will report the second-best new merchants in 2021. All of that means that this company still has a very bright future ahead. But temporarily enthusiasm for these triple-digit rates to come back down to earth.

Lewis: Yeah, I think that’s fair, and when I look at all this, hundred billion dollar businesses generally aren’t growing at triple digit top-line. I mean, that’s just not the way that the industry tends to work. We have to adjust our expectations a little bit for whatever happens after we move to more of a normal return to life. But there’s a lot to like your Shopify, a lot of optionality for them to explore. I’m really excited to continue to hold this business in my portfolio. You can really say the same for any of the companies we’ve talked about, Brian. Really strong results. I think the benefits of digital businesses, they’ve just been on full display for the last 12 plus months. All these companies play into that and they still have so many things pushing them forward.

Feroldi: Yeah. As we said at the top of the show, this quarter and next quarter are going to be the really most interesting ones from a year-over-year comparison, where the rubber is really going to hit the road is going to be in Q3 and Q4 when they are lapping many of those easy comps and a lot of their demand that was pulled forward, but really start to shine through and will drop their growth rates significantly. Those will be the reports that matter the most. But for now, it’s really fun to look at these reports and just say, wow.

Lewis: Yeah, well done. I think for folks listening, trying to take this in and understand the actionable elements of this, I think all of these remain good, solid businesses. We’re seeing great financials come out from them. The key there, I think, is the operative element of this, Brian, is expecting some weirdness at some point in the next couple of quarters. There has to be that moderation moment with this just because the growth has been so incredible for such a long time, that’s a part of the multi-year thesis though. All of the things that we like about these companies are going to continue to play out. There’s no reason for us not to think they’re going to play out over the next three, five, 10 years. But we might see some funkiness quarter-to-quarter, particularly as we get into the latter parts of 2021.

Feroldi: Expectations are everything so just temper yours if you are a holder of these businesses like I am. I own all three and as you said, no plans to sell any of them.

Lewis: No plans to sell. That could also be our tag line, Brian. Brian, thanks so much for hopping on today’s show.

Feroldi: Anytime, Dylan. Have a great weekend.

Lewis: You too. Listeners, I hope you have a good weekend. That’s going to do it for this episode of Industry Focus. If you have any questions or you want to reach out and say “Hey,” shoot us an email at industryfocus@fool.com or you can tweet us @MFindustryfocus. If you want more of our stuff, subscribe on iTunes, Spotify, or wherever you get your podcasts. As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don’t buy or sell anything based solely on what you hear. Thanks to Tim Sparks for all his work behind the glass today, and thank you for listening. Until next time, Fool on!