Shopify – Fountainheadinvesting

11/12/2024

Shopify’s (SHOP) $113 phenomenal results and guidance propels the stock 25% higher to $113 by mid-morning.

I bought and recommended Shopify on 8/8 and 7/19 for around $66 and $63. I also recommended it on Seeking Alpha in July.

Even with the post-earnings bump, which has taken it to $113, I still think it would be worth buying once the euphoria settles. This company is firing on all cylinders and should continue growing for the next 3-5 years.

Shopify excelled on several metrics for the third quarter ended Sep 30th, 2024:

Gross merchandise volume rose 24% to $69.72 billion, beating the consensus estimate of $67.78 billion.

Its revenue rose 26% YoY to $2.16 billion, beating expectations by $50Mn, which was the sixth consecutive quarter of greater than 25% revenue growth for the e-commerce company, excluding logistics.

Monthly recurring revenue rose 28% to $175 million vs. the consensus estimate of $173.6 million. Monthly recurring revenue is a higher-margin subscription revenue business used by larger clients for more features and modules and multi-channel operations. This is Shopify’s growth catalyst for the future, and they’re focused on building and scaling this to differentiate from competitors.

Operating income was up 132% to $283 million, and free cash flow grew 53% to $421 million.

“We have grown free cash flow margin sequentially each quarter this year, consistent with what we delivered last year. These results demonstrate the durability of our business, our multiple avenues for growth, and continued discipline of balancing both future growth investment and operational leverage,” highlighted CFO Jeff Hoffmeister.

The biggest reason behind the 25% jump is the guidance and improving profitability, confirming my earlier thesis that Shopify’s strong focus on providing a rich, multi-channel platform is allowing it to gain market share from plain vanilla, single-feature vendors. Shopify’s management had cited client wins from SalesForce (CRM) earlier as testimonials of its progress.

Guidance

Looking ahead, Shopify sees Q4 revenue growing at a mid-to-high-twenties percentage rate on a year-over-year basis, which is a higher implied rate than the implied guidance. The earlier guidance was 23% so that is quite a large improvement.

Operating Profit Margin will continue to improve, as operating expense as a percentage of revenues decreases to 32% to 33% from an earlier average of 35%.

Free cash flow margin to be similar to Q4 2023 — Around 19.5%, another solid improvement from the previous year.

I plan to buy on declines and hold for the long term of 3-5 years.

Shopify (SHOP) $60 – Big 25% drop post earnings.

Shopify is still on the expensive side at 9x sales with 21% growth, and 63 x earnings with 35% growth. But it’s a lot cheaper after the drop.

What caused the drop, and does it change the long-term growth outlook?

Both revenue and earnings beat in small amounts.
Guidance was in line if you adjusted for the sale of the logistics business.

The drop was more valuation-related, which was high, and GAAP profitability has over the past year, become a sensitive issue with higher interest rates.

That said, the business is really, really solid – they’ve had two price increases (plus and premium tiers) with little churn from customers.

It does have Shopify has a significant competitive advantage in its dominant segment of SMBs – in that it is the leader in small-to-medium-sized digital storefront provision of independent sites of access. The quality emphasis does resonate with customers who remain loyal.

I think it is worth accumulating on declines for the longer term- the only caveats being – that multiples are getting compressed and with Shopify’s relative maturity there will be scrutiny towards GAAP profitability, especially since their hyper-growth days are over. All that means that returns will be more sedate, but at this price, the downside is limited, with more upside potential.