SHOP posts a Solid Q2

Investment Analysis Clubs Saul’s Investing Discussions
1

A quick hot take on Shopify’s latest quarter:
I had written in my June portfolio analysis we may see “normal” revenue growth of 56% YoY, and we got 57% YoY revenue growth (13% sequentially)! This is normal by Shopify standards for Q2.

Q2 also saw non-GAAP net income rise 121% YoY (12% sequentially), subscription solutions revenues rise 71% YoY (4% QoQ), and merchant solutions revenues rise 52% YoY (18% QoQ).

MRR (monthly recurring revenue) came in at 95.1mm, representing 67% YoY growth and 6% sequential growth. GMV (gross merchandise volume) came in at $42.2 billion, 41%YoY higher or 13% sequentially.

I’m going to be doing more analysis once the transcript comes out, but the only weak point among these headline numbers I see is the 4% QoQ subscription solutions growth. This is a bit worse than last year’s Q2 subscription QoQ growth of 5%. But in Q2 2020, they gave away a lot of Shopify subscriptions for free. This makes the 4% number this quarter even worse.

But I think that, with revenue growth and the other headline numbers all coming in strong, it would be unnecessarily nit picky to say this was anything other than a strong quarter.

59 Likes
2

Thanks, Dave.

I have a question about your post. You wrote,

“I’m going to be doing more analysis once the transcript comes out, but the only weak point among these headline numbers I see is the 4% QoQ subscription solutions growth. This is a bit worse than last year’s Q2 subscription QoQ growth of 5%. But in Q2 2020, they gave away a lot of Shopify subscriptions for free. This makes the 4% number this quarter even worse.”

If I read that right, they had 4% growth in Q2 2021, when they were charging for the subscription feature. In Q2 2020, they had 5% growth when they were giving it away for free?

Wouldn’t the price (free) in Q2 2020 drive more people to try it (and possibly cancel it later), artificially inflating the number?

Or is there a typo, and it was free in Q2 2021?

1 Like
3

If I read that right, they had 4% growth in Q2 2021, when they were charging for the subscription feature. In Q2 2020, they had 5% growth when they were giving it away for free?

This quote from Q2 2020 sheds light on part of your question:
“While growth in the quarter was impacted by the 90-day free trial on standard plans offered from March 21st through May 31st, MRR ended the quarter higher than in Q1.”

See the dates listed there? Those do not perfectly line up with the dates of the beginning and end of Q2. Q2 for Shopify begins April 1st and ends June 30th. So there are some merchants who would have joined after the promotion started. Those guys had to pay full price.

Another reason for the rise in subscription revenues in Q2 2020 would be merchants who already had Shopify subscriptions and decided to upgrade to Shopify plus.

Wouldn’t the price (free) in Q2 2020 drive more people to try it (and possibly cancel it later), artificially inflating the number?

If they are giving away Shopify subscriptions and the merchants cancel before the first real bill comes, then it would not inflate subscription revenues. If they cancel some time after their first real bill, yes it could inflate subscription fees somewhat.

Anyway, my point was that 5% sequential growth was low for Q2 2020, but at least they could explain it away by saying “well, we had a successful promotion going on which lowered subscription revenues.” But in Q2 2021, the promotion is long over. So this time, they have low subscription solutions growth without any good excuse that I’m aware of. Once the transcript is out, perhaps we will learn why.

Again, worth reiterating that this is probably not gonna be worth getting caught up over. After all, subscription solutions growth has been quite good for Shopify the last several quarters. But if we start to see consistently low subscription solution revenues growth going forward, it could eventually hurt overall revenue growth.

15 Likes
4

So the 56.7% was slightly ahead of up to 55% growth that I had expected alongside Dan.

I found this to be a steady as she goes kinda quarter. Not much by way of business update beyond business as usual.

SFN still being tweaked (Q2 volumes similar to Q1 although more customers added)
Pay Instalments roll out completed in the US in May (not sure about Canada & no mention of ex NA for now)
Removal of App revenue 15% take rate for first $ million from next month (non material to Shopify)
Internationalisation of the business taking place (including Brazil!)
Gross and Net profits well above plan
One time gains from another pre IPO investment logged at >$700m
Interestingly Global e Online mentioned at least 3-4 x in the earnings call
Shopify Pay being extended across as much as social commerce as possible
UK re-opening seen as the analog for shift back to off line and omnichannel
Gross Payment Volumes reaching 48% penetration of GMV (up from 46%)
Shopify capital ending going through the roof (triple digit) and filling the gap in bank SME lending

Overall I am ok about this quarter but disappointed in:

  1. QoQ subscription growth and YoY comparison given last year’s easy compare
  2. Massive drop in GMV growth to 40% which is an indicator of where growth will normalise at

Given that the next few quarters represent tougher compares, I am concerned that I can see growth dropping into the 40%s.

Ant

12 Likes
5

I didn’t catch that Global-e was mentioned so many times in the call. It will be good to see the transcript. GLBE was up over 10% today and KeyBanc raised their price target from $42 to $75 today as well.

Anne
–long GLBE

4 Likes
6

Also - they were pushed hard to name their rumoured collaboration partnership in Brazil - maybe Mercadolibre or maybe SEA. If Shopify integrates there and pulls in Global e online there that would be awesome.

Shopify has literally 10x revenue in 5 years. If global e online can repeat that I will be happy.
Shopify had its first $1bn quarter in Q2 fwiw. Talk about scale!

Ant

12 Likes
7

I love SHOP and own quite a bit of the stock. I think, however, that we are seeing companies with high valuations that don’t have very strong numbers don’t trade favorably post earnings. This happened with Pinterest. Seems to be the case with Twilio as well. Doesn’t affect my long-term view on the stock and in fact if it traded down significantly, I’d buy.

Here is a valuation chart: https://viz.wiijii.co/chart/?id=-MfpdSQi2-6VOkEF3R6x

Shopify has a 51.7x EV/Revenue multiple. In no historical context can this be considered normal. These multiples are the only reason in my opinion that strong quarterly earnings may not be enough for the street. They have to be GREAT!

4 Likes
8

Given that the next few quarters represent tougher compares, I am concerned that I can see growth dropping into the 40%s.

Hi Ant,

I’ve only taken a look at the numbers and haven’t listened to/read the call yet. But since you mentioned a concern, I wanted to take a bit closer look into it.

I’m giving Shopify a pass on relatively slow subscription growth for the time being. Merchant solutions are beginning to make up a much larger portion of the pie. It is a 70/30 split right now and the gap will grow larger. It was great to see Merchant solutions growing at 17.5% sequentially (90.6% YoY) the past quarter. Gross margins suffered a bit compared to the prior quarter but not to a degree that is concerning at this point.

Shopify is a bit tough to model right now as their growth is generally lumpy but becoming smoother. I’m not going to try to perform much modeling. Merchant solutions are becoming a bigger and bigger part of the pie and growing quite well. I still expect decent growth from subs and don’t believe Shopify has even pulled the price increase trigger on subs as of yet.

My position currently hovers around 25% and I’ll be keeping the current allotment.
I can always change my mind, but don’t see a reason to do so now.

If growth does level off in the mid-40s for quite some time, I’m just fine with that even with multiple compression during that period. As you have stated, the growth at scale is very impressive.

Do you see anything differently?

A.J.

14 Likes
9

If growth does level off in the mid-40s for quite some time, I’m just fine with that even with multiple compression during that period. As you have stated, the growth at scale is very impressive.

Do you see anything differently?

Hi AJ

Just coming back to you on this. Not sure if you’ve had a chance to review the call yet but yes I’m still concerned.

Actually I am still concerned for Shopify in this scenario.

Scenario 1: I’m not concerned if a company is growing at 100% and the SP only grows at 50% and grows into its valuation multiple.

Scenario 2: I’m moderately concerned when companies with strong underlying fundamentals but for optics reasons (change in business model and lapping tough compares) are temporarily struggling and facing multiple compression but can ride it out or accept it when my positions are at the 2-5% levels. (That folder is already pretty full for me with Pure, Nutanix and potentially Zoom)

Scenario 3: I am very concerned when a company hits the growth wall and basically either turns ex growth (e.g. Cisco after the TMT/dotcom boom or IBM), when a company growth falls to the terminal velocity of the market which it has fully penetrated (Intel or potentially Facebook) or even starts to breakdown due to market/technology/execution challenges. Reasons why I have stayed away from Etsy and exited Okta?

Scenario 4: I would be extremely concerned with a 17% position - my largest by far going through interminable multiple compression due to a permanent step down in growth levels whilst sitting at one of the highest multiples on the market.

For that reason I have even trimmed Shopify, Crowdstrike and Cloudflare, (my highest conviction holdings) this year; when they have got too large an exposure for me (20% for Shopify and 15% for Crowdstrike), when I have seen faster growth opportunities at younger stages of the lifecycle and at much better valuations, (Shopify fed my Trade Desk and Zoom back in the day and Global e Online position this year, Crowdstrike and Cloudflare fed my Upstart, Fiverr and Digital Turbine positions in recent months).

I realise this reflects and conflates both real world situations as well as personal investor thinking and risk appetite but thought it worth sharing for what it’s worth given we are in the same boat on this one.

Ant

5 Likes