Motley Fool: A Shopify Spree

Amazon.com isn’t the only company demonstrating phenomenal growth in the $3.5 trillion retail e-commerce market. For example, there’s Shopify (NYSE: SHOP), which provides a platform to help businesses both large and small build out their online presence and increase their sales.

In its most recent quarter, Shopify’s sales shot up 50% compared with the year-ago quarter, and the total number of merchants on the platform now sits around 820,000. Shopify’s merchant solutions (which include payment transactions, fees and hardware sales) increased sales by 58%, and sales from subscription solutions jumped 40% year-over-year.

Meanwhile, Shopify is expanding its revenue streams by boosting its Shopify Plus service, which helps major brands and large companies with enterprise e-commerce services. Shopify Plus now accounts for 26% of the company’s monthly recurring revenue, up from 22% in the first quarter of 2018. The company is also venturing into fulfillment, launching a network of fulfillment centers.

Shopify’s share price has skyrocketed more than 100% over the past year, and with the company’s potential to tap the e-commerce market further, it still has plenty of room to grow. Risk-tolerant, long-term investors who are looking for a compelling e-commerce play able to scale along with businesses as they grow their online sales should consider snapping up some shares of Shopify. (The Motley Fool owns shares of and has recommended Shopify.)

Ask the Fool

Q: What are “current” and “quick” ratios? – O.P., Bloomington, Indiana

A: Both are measures of a company’s short-term liquidity. To calculate a company’s current ratio, go to its balance sheet and divide current assets by current liabilities. The result shows whether the company has sufficient resources – such as cash and receivables – to pay its bills over the coming year.

The quick ratio (sometimes called the acid-test ratio) is similar, but it’s a bit more meaningful, as it subtracts inventory and prepayments from current assets before dividing by current liabilities.

Quick ratios and current ratios of 1.0 are good. Consider a high ratio a red flag, as it can reflect assets sitting around unproductively. These ratios vary by industry, so compare a company only with its peers – or with itself over time – to spot trends.

Q: Can you explain “dollar-cost averaging”? – L.L., Hendersonville, North Carolina

A: Yup. Dollar-cost averaging is when you regularly spend a set sum on an investment over time. For example, you might invest $1,000 in Big Bangs Salon (ticker: BZNGA) stock every three months, for a year or longer. You’d do this regardless of the stock price – for example, buying 10 shares when the price is $100 and 12 shares when it’s $83.

With this system, you’ll be buying more shares when the stock price is lower, and fewer shares when it’s higher. It’s a good way to accumulate shares if your budget is limited, or if you’re not confident enough to invest a big chunk of money all at once, lest the market suddenly tumble. (Keep your commission costs in check, though – you don’t want to be spending, say, $7 to invest just $100.)

My dumbest investment

My dumbest investment was in shares of Fannie Mae. Need I say more? I lost much of my investment in a single day! Ouch. Never again. – C.G., online

The Fool responds: The Fannie Mae story has been complicated – and costly to many investors.

Fannie Mae, more officially known as the Federal National Mortgage Association, is a government-sponsored enterprise, or GSE, that, in its own words, is a “leading source of financing for mortgage lenders, providing access to affordable mortgage financing” to millions of homebuyers.

The GSE racked up losses in the 2000s from subprime mortgages, and in 2008, along with Freddie Mac (the Federal Home Loan Mortgage Corp.), it was bailed out by the federal government and placed under federal supervision. Its dividend was suspended and has yet to be reinstated. Its investors saw the stock fall from roughly $70 per share in 2007 to $7 on the day before the bailout, before plunging 90% the next day, to $0.73 per share, following news of the bailout. More recently, shares have been trading near $2.80, and Fannie Mae is still under government conservatorship.

A lesson here for investors is to dig deeply into a company’s situation and prospects if its shares start falling significantly. Better still, keep up with the company all along, to reduce chances of being unpleasantly surprised by bad news. Diversification helps, too: Don’t keep too many eggs in any one basket.