Shopify Inc. (SHOP), headquartered in Canada, has just announced its latest quarterly results. Its main performance is strong sales and strong earnings. The company’s e-commerce platform for customer solutions and payment tools continues to benefit from the basic trend of online retail, which has been boosted from the pandemic this year. In recent years, the stock has been a big winner. By 2020, the stock has risen by more than 155%, which is a recognition of its market leadership. Although people are worried about the company’s high valuation, we think the results speak for themselves, and given that this is one of the best growth stories in the market, the bullishness is necessary. Shopify continues to defy expectations and maintain a positive long-term outlook.
SHOP Q3 earnings review
Shopify released its third-quarter earnings report on October 29, with non-GAAP earnings per share of $1.13, which was $0.63 higher than expected. Even more impressive is that the company’s GAAP earnings per share were $1.54, while the market generally expected a quarterly loss of $0.15. The company’s revenue trend was driven by a sharp increase in revenue figures, which was US$767 million, which was US$115 million higher than expected and a 97% year-on-year increase.
(Source: Company IR)
In these two operating divisions, subscription solutions revenue grew 48% year-on-year, while merchant solutions grew 132% compared to the third quarter of 2019. Due to changes in the income structure of merchants, gross profit margin dropped from 55.5% last year to 52.8%. Solutions are becoming more and more important. Nevertheless, we emphasized that the growth of operating expenses was lower than the growth rate of revenue, which increased by 41% year-on-year, leading to a surge in operating revenue. As the existing internal company infrastructure supports higher capacity, people are expected to benefit from scale.
In terms of operational indicators, the total commodity transaction “GMV” conducted through the platform reached 30.9 billion US dollars, an increase of 109% year-on-year. The total payment “GPV” reached 14 billion U.S. dollars, higher than the 6.2 billion U.S. dollars in the third quarter of 2019, which is the high-profit segment. The management pointed out that performance is driven by new businessmen who join the platform. As the business develops, new businessmen can drive the demand for related tools and services. With monthly recurring revenue (MRR) reaching $74.4 million, the company has seen the success of the conversion from the extended free trial program to the new merchants offered since June this year.
(Source: Company IR)
Although the company did not provide full-year revenue guidance or growth targets, management expects that as the pandemic will continue to support the business environment, online retail will show a positive trend. The company had $6.1 billion in cash and cash equivalents at the end of the quarter, and total long-term liabilities were less than $1 billion. A solid balance sheet is the advantage of a company’s investment profile.
Analysis and forward-looking comments
The advantage of Shopify’s business model is that merchants who enter the platform are essentially connected to the ecosystem, which represents a long-term recurring income relationship. As businesses develop independent businesses, Shopify uses more tools and services to expand sales opportunities to obtain higher fees. The result is that recurring income can expand over time, and it becomes more difficult for merchants to leave and find alternative solutions. The bullish situation for Shopify is that it is still in the early stages of profitable growth and has more than expected upside.
(Source: Company IR)
That being said, even with this outstanding quarter of growth and profitability, Shopify continues to trade at extreme valuations. Including the latest third quarter data, the price of the stock in the past twelve months has been approximately 50 times the selling price. There are still reasons to believe that only Shopify-sized companies can provide nearly 100% revenue growth and are expected to maintain the growth momentum.
A related comparison with Shopify is Zoom Video Communications Inc. (ZM), which has achieved unexpected gains this year with its video conferencing technology based on work from home and virtual learning trends. In the last quarter, Zoom’s revenue increased by 355% year-on-year, and the stock is now trading at even higher prices, reaching a sales multiple of 107 times, while SHOP’s sales multiple is 50 times. Strangely, considering that the SHOP EPS for the past 12 months is $1.57, the P/E ratio is about 635x, which is similar to Zoom’s P/E 630x.
Although the two companies are located in different departments and have completely different business models, the point here is that the market tends to reward this growth momentum. We believe that, compared with Zoom, Shopify has a more diversified business and provides customers with more tools and services. This is a stronger company, and Zoom is essentially a trick in our opinion.
According to consensus estimates on Shopify, the company is expected to continue its growth trajectory, double its revenue again by 2022, and even maintain a growth rate of more than 25% in 2023. Keep in mind that these estimates have not been updated to incorporate the latest third quarter results and may result in higher corrections based on momentum. The concentration of new merchants and higher MRR trends provide a framework for these estimates to be considered achievable.
(Source: Seeking Alpha)
If these forecasts are confirmed, the stock has room to effectively grow to the price-to-sales ratio, which will shrink to less than 20 times in the next four years. By then, it can be concluded that a technology company’s revenue is growing at a double-digit rate, revenue continues to grow, and recurring revenue is high, and it will continue to occupy a higher premium in the market.
In the long run, potential growth drivers include the penetration of online shopping. Compared with traditional physical retail, online shopping continues to gain market share. Data implying that only 60% of the world’s population is connected to the Internet indicate that Shopify has a huge e-commerce gap globally, and Shopify can seize this gap well through its market-leading platform. No matter which retailer succeeds in the next ten years, Shopify’s e-commerce solutions that do not rely on the platform can benefit from it. Initiatives such as the introduction of more payment and transportation vehicles, continued international expansion, and advancement into the wholesale/business-to-business sector represent continued growth opportunities.
(Source: Company IR)
It is difficult to oppose revenue growth of 97% year-on-year and the new prospect of accelerated earnings. While recognizing business advantages and positive long-term prospects, We rate SHOP stocks as hold Taking into account the current valuation and already very bullish expectations. Our message here is that although we may be neutral on stock prices, there is no indication that Shopify is a “huge short” opportunity, or that the stock price may plummet in the short term.
Tactically speaking, the stock has been trading in a relatively narrow range in recent months, at approximately $1,000 per share. In many ways, the merger process is healthy and can provide a solid foundation for the stock to continue to climb, as it continues to provide reliable operational and financial performance. A drop below $900 may create new buying opportunities.
In addition to the global deterioration of the macro environment, the risk here is that the company missed the upcoming quarterly growth estimate, and business growth has slowed significantly. If the speculative capital of the stock is lost and attracts more bearish sentiment, the stock may be under pressure. Monitoring points include gross profit margin. As the company expands into new international markets, we hope that gross profit margin will remain above 50%. Taking into account the trend of this year’s pandemic, in the next year, Shopify may face some difficulties. Nevertheless, the future story will still be higher earnings momentum, because the company can pull leverage to drive profits and free cash flow more positively.
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Disclosure: I/we did not mention any stock positions, nor did I plan to initiate any positions within the next 72 hours. I wrote this article myself and expressed my opinion. I have not received any compensation (except for seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.