Shopify is one of only two Enterprise level positions in the Freedom Portfolio, but many people might not recognize the name. So what does Shopify do? Put simply, they make it easier for small companies to set up an e-commerce solution and sell things online. They have products to assist setting up online stores and to deal with fulfilling orders.

Shopify is one of my three largest holdings currently. Like Amazon (AMZN) and Netflix (NFLX), the other two positions in my top 3, Shopify got there by earning it. Out of the entire portfolio, it’s my third best performer, up around 230%. That’s incredible growth that has crushed the S&P during that time (see below). The only two positions in the Freedom Portfolio that have outperformed Shopify are (fittingly) Amazon and Netflix.

Two weeks ago, Shopify (SHOP) had their third quarter earnings report. Here are some of the key takeaways:

• Revenue increased 58% year over year
• Operating expenses increased 61% year over year
• Gross merchandise volume increased 55% year over year

Basically, their customers are selling more stuff, they’re making more money as a result, but they’re also paying a lot more for all of that growth. It’ll be interesting to see what their next quarter results look like, since the fourth quarter is typically strong thanks to the holidays.

P.A.U.L. Score

Protected: 3

By all accounts, Shopify has a pretty strong product. Also, seeing as one of the major selling points for Shopify is that they simply many of the technical aspects of e-commerce, it’s not something that most small companies are likely to want to take the time and effort to switch often. Those high switching costs should give Shopify a limited amount of protection.

At the same time, though, they are in a space that has a lot of competitors where it is really easy to enter the market. It’s not too inconceivable that a new competitor could appear with some flashy new offering that takes market share.

Alternatives: 4

It’s hard to judge just how many alternate paths that Shopify has in front of it, although one could look at a competitor like Square (SQ) for inspiration. Management has already shown a willingness to expand beyond their initial smaller niche by creating solutions for larger customers and introducing new things business lines like Shopify Capital. I suspect CEO 
Tobias Lütke has some more ideas up his sleeve, so I’ll give him the benefit of the doubt for now.

Understanding: 3

Some parts of Shopify are fairly easy to understand. They make part of their money from monthly subscriptions that clients pay to access some of Shopify’s services. A larger part of their revenue comes from payment processing fees, transaction fees, shipping services, and credit card readers. In essence, as Shopify’s clients become more successful and sell more things, Shopify makes more money.

However, as Shopify branches out into different lines of business (such as the aforementioned Shopify Capital), it can start to get a little messier to keep track of. For now, I’ll place it in the middle of the pack, although I wouldn’t be surprised to see it drop in the future.

Long Runway: 4

Is this entrepreneurial movement towards more small businesses a sustainable long term trend? Or is it just a fad? Right now the majority of Shopify’s business is in North America (it is a Canadian company). Can they replicate their success overseas? As some of their small-to-mid-sized customers get larger, can they retain them as customers? There are a lot of question marks for Shopify going forward, and there undoubtedly will be a lot of challenges, but there’s also a lot of opportunity. I suspect that they will see enough successes to more than offset any failures.

Total Score: 14

Not a bad score, which is good, considering it’s a top three holding by size. I am starting to have some slight concerns regarding whether their growth is sustainable and the challenges that they might face going forward, though. Trump’s proposed changes to the international postal rate system could hurt dropshipping companies, which seems like something Shopify has a lot of exposure to. There’s also a question as to how much they can continue to recruit new customers and what percentage of their current customers can stay in business. I’m certainly not looking to sell right now, but if there comes a time when I want to free up some capital to start or add to another position, then I might consider trimming some of my Shopify position.

Stay tuned.