Shopify (SHOP) – Earnings Review – May 8, 2024
Shopify is a web-builder on steroids. It automates the creation of slick, powerful store design. It provides ubiquitous channel integrations and offers several other products to round out its niche as a merchant’s “commerce operating system.” Its goal is to remove the headaches associated with building a business and to allow merchants to focus on growth rather than system maintenance. It gives businesses of all sizes the tools previously reserved for the largest enterprises in the world – and calls many Fortune 500 brands its customers too. If you’d like to learn more about this firm, my deep dive can be found here.
Demand
- Beat revenue estimates by 0.8% & met the high end of its low 20% Y/Y revenue growth range.
- This was its 4th straight quarter of 25%+ Y/Y revenue growth ex-logistics. Revenue growth excluding that asset sale was 29% Y/Y.
- Beat gross merchandise volume (GMV) estimates by 2.4%.
- Beat gross payment volume (GPV) estimates by 3.4%.
Total take rate rose from 3.04% to 3.06% Y/Y. The rise is despite a material headwind from selling its logistics business. This is something I found pleasantly surprising, given the challenging comp item.
MRR = Monthly Recurring Revenue
Source: Brad Freeman – SEC Filings, Company Presentations, and Company Press Releases
Profits & Margins
- Beat EBIT estimates by 6.5%.
- Beat FCF estimates by 44% & beat FCF margin guidance comfortably. FCF roughly tripped Y/Y to $232 million.
- Missed GAAP EPS estimates due to equity investment losses.
- Beat $0.17 EPS estimate by $0.03.
Price hikes and hosting efficiencies both helped gross margin during the quarter. Selling the logistics business also greatly helped gross margin. Conversely, less non-cash revenue from strategic partnerships hurt margins; that revenue segment is essentially pure profit. GAAP operating expenses (OpEx) fell by 4% Y/Y to $871 million. This was in line with Shopify’s guidance.
Source: Brad Freeman – SEC Filings, Company Presentations, and Company Press Releases
Balance Sheet
- $5.2B in cash & equivalents.
- $0 in traditional debt.
- $916M in convertible senior notes.
- Basic share count rose slightly; diluted share count fell slightly.
Guidance & Valuation
Shopify’s outlook bakes in resilient North American spending (as that’s what it’s seeing), sharper FX headwinds and some weakness in European consumer spending.
Shopify sees high teens revenue growth vs. 19.5% Y/Y growth expected by analysts. This is technically a miss. If we assume “high teens” = 18% Y/Y growth, it’s a 1.0% miss vs. consensus, although Shopify does love to consistently sandbag every single quarter. Growth is expected to be in the low-to-mid 20% range excluding the sale of its fulfillment business.
All of the estimate data out there is for non-GAAP EBIT. Shopify guides to non-GAAP GPM, but GAAP operating expense growth, which makes it difficult to determine beats or misses. We’ll do the best we can:
It sees a 50.9% non-GAAP gross margin vs. 51.0% expected. It sees GAAP operating expenses as a percent of revenue falling to 45%-46% of sales. Guidance includes its first in-person Summit event since 2018. These events usually cost about a few million.
Shopify trades for 60x next 12 month FCF expectations (very similar for EPS). There was a lot of talk today about Shopify’s valuation and it being overpriced. I wanted to address that and why I’m ok holding a pricey stock like this one. I see Shopify compounding FCF at a 41% clip for the next 2 years (very similar for EPS) after small upward revisions likely play out after this report. This is slightly ahead of sell-side consensus, but by a much smaller margin than the FCF beats Shopify has been delivering. Is Shopify cheap? No, no it is not. But a 1.5x growth multiple using either FCF or net income… for a name like this… with its category position, runway, growth expectations and team… is not at all unreasonable in my view. As consistent readers know, I had been trimming through 2023 and into the new year as the PEG got closer to 2x. At 1.5x, I resumed accumulating this afternoon.
Call & Release
AI and Efficiency Gains:
Shopify remains committed to minimizing cost wherever possible while continuing to compound at a lofty clip. AI is a big piece of this, and thus far, applications here have centered around “tools to simplify operations and productivity” for both Shopify and its merchants. For example, AI is now automating more than 50% of its customer support interactions and is allowing the company to add 8 new languages to its 24/7 live support. AI is also being used to automate product catalogs and simplify store design for its merchants. AI is in inning one of making Shopify more efficient and its merchant base’s success more intense.
From a marketing point of view, GenAI advancements in targeting algorithms are giving it significantly more opportunity to productively spend. Within performance marketing, Shopify raised ad load by 130% Q/Q while staying under its fixed payback period requirement of 18 months. From Q3 2022 (when it got serious about cost control) to today, its merchant acquisition pace has doubled while its customer acquisition cost has fallen by 60%. That is AI concretely helping operations… right here and right now. It has a plethora of incremental opportunities to advertise to new merchants with strong return on ad spend (ROAS).
The Payments Suite:
The payments suite now represents 60% of total volume vs. 58% Y/Y. This is a gross margin headwind, but not an EBIT margin headwind, as OpEx intensity is much lower compared to its subscription business. Shopify sees momentum continuing as it localizes its payments suite across the globe and as every single product in this bucket resonates. Another piece of this expected payments proliferation is Commerce Components by Shopify (CCS). This is its large merchant bundle that allows massive brands to select products individually. This freedom led to Coach signing with Shopify to use Shop Pay (its checkout accelerator) across all North American stores. Speaking of Shop Pay, volume rose by an impressive 56% Y/Y to $14 billion to reach 39% of total GPV.
For its offline point of sale (POS) hardware and POS Pro subscription, momentum is equally strong. New tools like deeper receipt customization are helping here as its planned accelerated marketing spend is working well. Overall, offline growth was 32% Y/Y while growth in POS merchants with 20+ locations rose 52% Y/Y.
Business to Business (B2B):
GMV for this channel rose by a whopping 130% Y/Y. Volume within the easy self-serve ordering flow for a B2B merchant’s customers rose by 7x Y/Y. The traction makes sense considering the product allows buyers to take advantage of shedding a large portion of manual order processes. This is giving them more time to focus on growth, rather than maintaining relationships.
Shopify recently updated the onboarding process for B2B merchants to make adding this tool as easy as clicking a button (like its other channels). All of this helped it gain recognition from Forrester as a B2B commerce leader for the very first time.
- Launched its POS suite in Australia.
International Growth:
- GMV outside of UCAN grew over 35% for the 3rd straight quarter. European volume growth was 38% Y/Y as Shopify endures a tough environment there much better than its peers.
- Shopify Markets (its cross border selling tool) enjoyed 70% Y/Y usage growth, while multiple named merchants enjoyed 100%+ uplifts in global selling volumes immediately after adding this product.
- Overall cross-border GMV rose by 15% Y/Y.
Merchant Wins Highlighted:
- Overstock.com. Shopify completely overhauled all of its systems and migrated the company’s stack in under 100 days.
- Barkbox. This is Shopify’s largest merchant to date based on the size of its subscriber base.
- Harry’s, Skullcandy, Carter, Soul Cycle, Juice Plus.
Product-Specific Notes:
Shopify Cash (rewards program for consumers/marketing program for merchants) and buy now, pay later (BNPL) were cited as the two segment standouts.
For Shopify’s subscriptions segment, standard tier price increases in Q2 2023 helped growth a bit, along with general strength in new merchant additions. The Shopify Plus price hike didn’t impact growth materially this quarter. Merchants had until the end of last month to commit to 3-year contracts at the lower price. Most of them did so, which means the impact of this price hike will be smaller than the standard tier hike. That was the goal here as the team pounded their chests about the conversion rate. The main benefit will be better revenue visibility, although there will be some revenue help during the second half of the year for new merchants paying the higher price.
Take
Good quarter. The guide could have been better, but the in-line-to-slightly-weak outlook comes from a team that has shown you that they intentionally under-promise every quarter. I fully expect Shopify’s actual Q2 results to be above what they just forecasted, and I fully expect more of the same profitable compounding for this market leader in a giant category.
I will continue to approach Shopify as I have since starting the position in August 2022. This thing chops around like crazy and its forward multiples do too. I will keep taking advantage. As a loose idea, I will continue to trim as the aforementioned PEG ratio approaches 2x and will continue to lean back in as it approaches 1.5x. It’s right around 1.5x… so added for the first time in a few quarters.
The hecklers will heckle (what would we do without them) and people will create reasons to explain the selloff that are just disconnected from reality. See my Twitter feed comments (fair warning, some of them are pretty ~special~) for examples of what I’m talking about. A stock falling 20% in a day is never fun, but in this case, and from my point of view, it’s an opportunity.
