As someone has already pointed out, Bert is relatively more conservative than we are and more of a value investor, so take that into account.
Here is my paraphrasing and summarizing of his take on earnings. He covers most of the points that people have been obsessing about (churn, stock-based comp, cash flow issues, etc). Very worth the read.
For most companies, the results posted would have been considered a blow out. After all, revenues grew by 72% and were 3.6% above the consensus. And adj EPS turned positive sooner than guided. And GAAP gross profits rose by 86%.
The improved gross margins are a function of scale but also a function of a gradual mix shift to higher margin services such as Shopify Shipping and Shopify Capital. The opportunity for Capital is clearly enormous as can be seen from the growth that Square has had with it. No one has any idea of how large the opportunity might be.
Subscription revenue growth at 65% actually slightly reaccelerated. At this point Shopify has such a powerful brand name within e-commerce that it will continue to expand its market share. But the real cause for the reacceleration in growth was the huge jump in revenues coming from Shopify Plus.
Shopify Merchant solutions revenue, rose by 78%. While merchant services has substantially lower gross margins at this point compared to subscription services, the gross margins for merchant services jumped sharply from 28% to 37%, and should be higher still in Q4 based both on volume and a higher percentage of revenues coming from software services.
Shopify continues to show operating cash flow losses on a headline basis. These headlines showed a cash burn of $6.2 million last quarter and about $11 million for the year to date. That is entirely a function of the company’s loan program with merchant cash advance receivables rising to $50 million last quarter. Excluding the amount of these cash advances, the cash generation this past quarter was about $13 million.
Stock based compensation more than doubled over the period. Hiring developers these days means paying out stock-based awards as part of a recruiting package, and given shopify’s growth plans, stock based comp will continue to increase rapidly.
Shopify does not supply churn statistics which apparently is a bone of contention for some observers. That said, the company now has subscriptions from more than 500k businesses. That has almost doubled in little more than a year.
Rating a quarter for a shooting star
One of the things that can’t be stressed often enough when considering Shopify is that it has essentially established a category by itself and really has little in the way of direct competitors. For those users who want to establish a retail business online these days, SHOP almost is certainly the solution of choice.
One of the things about the so-called Citron research is that it has been done without the slightest knowledge of or evaluation of who actually subscribes to SHOP and why they do so. How might I write so confidently about that? Well I am, in another life, a SHOP merchant and conducted a reasonably thorough evaluation before acquiring the software with knowledgeable web designers assisting me in my endeavor. Most of what has been written by Citron on this subject is not just wrong - but exactly wrong.
Some of the growth in subscription services is a function in the growth of Shopify Plus, where monthly pricing starts at around $2000/month and can be several times that amount (up to $40,000 month, actually) compared to $30 for base Shopify. So, it is no longer strictly a function of increasing the number of users at an accelerating rate in order to forecast dramatic growth for subscription service revenues. Shopify Plus revenue is rising very rapidly at this point and it is now 20% of monthly recurring revenue compared to 18% of that metric last quarter. That is a sequential growth rate of almost 25%.
The growth of merchant services revenue is going to be a significant function of the growth of the larger sellers on the Shopify Plus. There comes a tipping point, I think, at which point all but the largest retailers make the decision to use some kind of a hosted service for their e-commerce sales. That is really the heart of the bet one is making.
I presently do not own the shares - I sold them at prices less than here. But to be fair that was a few months ago. I’m searching for the right entry point. I think the shares can be attractive because there really is nothing quite like SHOP available to investors. For investors with a long-term horizon, wanting to own shares in what is clearly the best in class company in this space, SHOP is as good as it gets.
Disclosure: I have no position, but may initiate a long position in SHOP over the next 72 hours.