By Miles Clyne
Years ago I remember reading about who became the wealthiest in the gold rush days. It wasn’t the hordes heading into the wild to discover their fortunes. It was the people selling the picks and shovels to them.
Gold can still be an attractive investment, but there is a new gold. Its green and called cannabis. Making money off of cannabis is very diverse given the many opportunities there are in the space, from growing, and manufacturing to selling the end products. As an investor you can participate in any or all areas.
One area is similar to the retailers of old who sold the picks and shovels to the miners. Given Canada’s marijuana market is estimated to be about $7 billion, online retailer Shopify has the potential to generate substantial profits through recreational cannabis sales. South of the border the US market is multiple times larger than the Canadian market. Every state that legalized recreational marijuana is another potential market for Shopify.
Once legalization happens on the federal level in the US, Shopify will likely have had several years of cannabis retailing under their belt. Shopify is no stranger to large volumes of transactions. Last year it’s estimated they had about 35 billion transactions.
In Ontario, cannabis will only be available for purchase through government-run online or retail stores. Shopify’s deal with the Ontario government will see the Shopify commerce platform utilized for online and in physical stores to process sales and manage accounting and inventory. With over 150 cannabis stores expected to open over the next several years, Shopify made a wise move in becoming the solution of choice to the province of Ontario for retail sales of cannabis.
It’s logical that if a system meets the government’s needs, it will also meet the needs of the private sector. In March, cannabis company HEXO announced that it will use Shopify to build the e-commerce platform for their products. Shopify is positioned to facilitate a turnkey structure for both the regulators and the regulated.
For anyone wanting to start an online store, cannabis or otherwise, Shopify turns something challenging into something simple: managing inventory, processing payments, and running analytics. How simple? You can use your cell phone to run your business.
What about some of the big competition like Amazon, eBay and Facebook? Both Amazon and Facebook have partnered with Shopify. And Shopify customers have access to eBay as well.
Shopify by any measure appears to be a great business and e-commerce model. No warehouses or overhead to squeeze margins. Their gross margins run at about 70% and customer retention rate is near 100%.
Given the majority of retail sales still don’t take place online; there should be a huge opportunity for Shopify to keep growing their presence and services. Shopify estimates that they are only reaching about 1% of the 46 million small and midsize businesses globally.
There are risks, Shopify has plenty of competition from competitors like BigCommerce, Woo, and Wix. Shopify trades at a high valuation relative to earnings, but there are high expectations.
If you don’t feel comfortable investing directly in cannabis companies, maybe owning a company that may make a little bit of money each time a cannabis product gets sold online is another avenue to consider?
Full disclosure, we own Shopify in our Canadian Composite Model. We’re always happy to talk about what we own and why.