Shopify Sep2018 Quarter

In my last monthly review I stated:

I’m still very hopeful for Shopify, but a couple things they said in the call were concerning. I think they have a clear mandate: if revenue is going to decelerate, spending must also. We’ll see how this shakes out the next couple quarters.

…I’m not selling now, and no plans to trim further, but I can’t see myself adding, either. I’m happy with a position in the 5% - 8% range. There are a few questions they need to answer before I’ll again be as confident as I once was.

So, now that they’ve reported a quarter, how am I feeling?

Did revenue decelerate?
Well, I was pleased that overall revenue grew 58%, and while this is lower than last Q or last year, it’s still very good. Even as it inevitably slows to 50%, 40%, and even lower, the only question will be whether or not they can start to print cash.

I was even happy with the 46% growth in Subscription revenue and the 68% growth in Merchant Solutions revenue. To me, there are no problems at all with the revenue side of the equation. Growth is slowing percentage-wise, but the growth is still happening!

What about spending?
Well, at first I was frustrated that OpEx once again grew faster than gross profit, and even revenue. But when I looked closer, I found that most of the increase was concentrated in R&D, and that S&M and G&A actually grew slower than revenue. I’d like to see that become a trend, but I guess we’ll see. Shopify definitely seems to still be in investment mode, which is odd to me. With revenues growing less and less, it seems crazy to keep spending at the rates they are. Perhaps we will see it taper off in the next several quarters, or maybe revenue won’t slow as much as we fear. But eventually something’s gotta give.

I was disappointed not to see more discussion about spending. They did say the cloud migration was finished, so there might be an improvement in gross margin there in Q4, but I wouldn’t expect too much.

All in all, I didn’t see enough to make me want to increase my position, but I still feel very good about Shopify going forward. At a PS near 15, I don’t think it’s “cheap,” either, though. I’m not sure if that means I’ll continue to hold, or sell and look for a slam dunk elsewhere. But for less aggressive investors I think holding Shopify for years still makes sense.