SHOP - Shopify for post SAAS?

Hello all, I was just looking through the boards to try to find any current discussions of SHOP and it is amazingly silent out there. Since many of us find a need to replace some of the SAAS names in our ports, I offer up Shopify (maybe again?) for consideration.

They apparently killed it on earnings, and they are WAY up today. I’ve seen it at 25% up at times!!! I think the earnings were good, but not that good…sheesh.

Margins are returning to the low 50’s, so it seems to match or beat some other stocks being posted about here. Their revenue continues to grow, international expansion continues and their ARR (or as they call it monthly reoccuring revenue - MRR) continues to grow.

Doing up the spreadsheet for today’s post, I only just realized that they hit profitability in Q3 2023. It was very difficult to actually find as there was none of the usual hoopla when darling companies turn profitable. Odd to me that it wasn’t celebrated more.

Anyway, here are the numbers, more notes afterward.

Looking at Q2 2023 there is a HUGE jump in the income loss number. This was related to the markdown of the delivery(?) company they bought as part of their attempt to get deeper into logistics. But, having that logistics arm was dragging down margins from low 50’s to mid 40’s. Notice that after the logistics unit was sold the margins come right back up to low 50’s. That seems to imply the base business is fine.

Another note I came across in the research is that Q2 2024 was first time that gross profit came in at ONE BILLION dollars. Income from operations (gross) was up from $86mil previous quarter to $241 in Q2. That growth in income from operations appears to continue to the most recently posted quarter.

They currently plan for continued mid 20’s growth in revenue and similar expansion in margins for the remainder of the year.

Overall, I like the trends and I love that the business is still strong. What I need to do now is dig into valuations. This is the largest position in my portfolio, only matched by MSFT (Microsoft). (MSFT is not technically a Sauldom candidate, but it is part of my own risk leverage decisions.)

Anyone else have notes to promote, or delete Shopify from the Saul universe? I will keep posting update if it adds to our investing options and meets the rules.

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Been trying to dig into valuations (in-between work tasks, shhhh) and not really getting too far. All the websites I found were based on prices from a week or so back. Now, post earnings, where the heck are we?

I see that across measurements, Shop seems to be pricer than comps like Amazon, Ebay, Etsy, but it is dwarfed by the valuation of Wix (who? wtheck? when did they become popular again?!?!)

But, I found this on Seeking Alpha (SA):

The stock currently trades at about 11x '26 sales post-earnings, which approximates the average observed across its high-growth software peers. We believe the lack of valuation premium allocated to Shopify on a relative basis to its leading growth prospects highlights the impending uplift enabled by additive enterprise opportunities remains underappreciated at current levels.

It seems they are also bullish on the move of SHOP to go for very large, enterprise type customers. This is a new direction that I missed because I was just cruising with this investment and hadn’t really beefed up my knowledge in a long time. So they are signing on the likes of Toys-R-Us (thought they were ded) and Matel. They are going straight after the customers on Salesforce’s CRM.

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Hi dlbuffy

Thanks for bringing SHOP back to the board.

For those that lost line of sight of this, Shopify has been re-accelerating its revenue growth significantly over the last year or so (reaching 26% YoY in Q3 after posting a 15% low point in Q2 2022) and is now not only firmly profitable (which has exploded since Q2 2023) but is also accelerating its free cash flow margin (reaching 19% in Q3).

Reaching cash flow breakeven and profitability probably didn’t attract much hoopla as it had been there before the logistics foray which they exited 6 quarters back.

You have correctly identified some of the moving parts that account for the return to profitability and return to growth (e.g. exiting logistics) as well as some of the characteristics of the “New” Shopify (enterprise focus).

A couple of other points folks should know about the transition as well as the “New” Shopify…

  1. The exiting of logistics came with a couple of key decisions i) To stick to their core focus of commerce software and ii) To establish a partnership and an accommodative stake in Flexport which was the firm that took over the logistics operations. The net result is Shopify retreats to a software focus, a key partner fills the service gap for merchants and Shopify adds Flexport to its list of key partners that he holds an equity interest in (STRIPE, Affirm, Global e Online being other examples)

  2. They went through 2 rounds of price hikes (one with their base offering and another with their premium services). These aren’t a clear one time line in the sand affair as merchants were either partway through existing subscriptions or took advantage of prepaying a one time lock in to the old rates. We are probably 2/3rds through the first round of price hikes and maybe 1/2 way through the second. This is juicing the revenue growth rates as well as improvements in operating and cashflow margins

  3. “New” Shopify for those that haven’t kept tabs on the company is represented by some key characteristics that one might not recognise. Shopify still offers Shopify and Shopify Plus merchant subscription solutions and has continued to extend its penetration of its platform’s GMV and Merchant solutions with Shop Payments and Shop Capital however it has also:

  • Shifted from the SMB to also Enterprise offering both a full stack of commerce O/S and software as well as “components” for Enterprise individual adoption
  • Moved beyond online to offline with its POS systems
  • Offered Shopify Tax and Shopify Managed Markets in addition to existing commerce functions
  • Entered the B2B e-commerce market
  • Adopted AI as a merchant agent as well as AI enabled chat bots
  • Extended its international coverage to over 175 markets and targeted cross border commerce as well as international e-commerce which is significantly outgrowing North America

Q3 Key Metrics:-

  • Q3 GMV of $69.72B

  • Revenue of $2.16B (+26.3% Y/Y) beats by $50M

  • Monthly recurring revenue up 28% to $175M vs. consensus estimate of $173.6M

  • Operating income was up 132% to $283 million

  • Free cash flow grew 53% to $421 million

  • Outlook: For the fourth quarter of 2024:

    • Revenues to grow at a mid-to-high-twenties percentage rate on a year-over-year basis;
    • Gross profit dollars to grow at a year-over-year rate similar to Q3 2024;
    • GAAP operating expense as a percentage of revenues to be 32% to 33%;
    • Stock-based compensation to be $120 million; and
    • Free cash flow margin to be similar to Q4 2023.

Latest results (ER, webcast and presentation) are to be found here:
https://shopifyinvestors.com/home/default.aspx

Ant

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