Revolutionary Q2 2023 Results Cement Shopify’s Ecommerce Dominance (NYSE:SHOP)

On August 2, Shopify (NYSE:NYSE:SHOP), one of the leading companies in the global e-commerce software market, published its financial results for the second quarter of 2023. These results not only beat analysts’ expectations but also showed that demand for Shopify Payments and the company’s other platforms is growing faster than many on Wall Street expected.

Shopify’s revenue was about $1.69 billion, exceeding our expectations by $30 million. At the same time, the company’s Q2 non-GAAP EPS was $0.14 per share, up $0.04 from our forecast. But despite this, Mr. Market negatively assessed Shopify’s financial report, mainly due to higher investor expectations for its operating income. One of the reasons for the lack of growth in the company’s operating income margin is the reduction in the size of its workforce by 23%, which was announced in early May 2023. The consequence of this decision by Shopify’s management was $148 million of severance-related costs, which had a short-term negative effect on its financial position.

The five largest shareholders of Shopify, with a combined stake of 21.84% in the company, have long been such Wall Street mastodons as Morgan Stanley, Baillie Gifford and Company, Capital Research Global Investors, Vanguard Group, and Capital World Investors.

With the continued trend of increasing Gross Merchandise Volume (“GMV”) and Monthly Recurring Revenue (“MRR”) year on year, Shopify’s share price has risen by more than 65% since the beginning of 2023, outperforming such competitors as Snowflake (SNOW), Cloudflare (NET), and Akamai Technologies (AKAM).

We initiate our coverage of Shopify with an “outperform” rating for the next 12 months.

The financial position of Shopify and its prospects

Shopify’s revenue for the second quarter of 2023 was $1.69 billion, up 11.9% from the previous quarter and 30% from the second quarter of 2022. However, Shopify’s actual revenue has beaten analyst consensus estimates in seven of the past ten quarters, indicating Wall Street’s conservative estimate of one of the e-commerce giants.

The company’s revenue growth was driven by an increase in the number of merchants using Shopify’s platforms, including those that switched from free trials to full-price subscription plans during the first half of 2023. In addition to revenue growth from Shopify Payments, including through higher fees from partners, Shopify Capital, a financing program, is showing positive results. Shopify Capital’s revenue growth is mainly due to increased outstanding loans and gross merchandise volume.

According to Seeking Alpha, Shopify’s revenue for Q3 2023 is expected to be $1.64-$1.7 billion, up 3.1% from analysts’ expectations for Q2 2023. However, according to our model, Shopify’s total revenue will be above this range, amounting to $1.72 billion. First of all, this will be due to the numerous initiatives taken under the leadership of Tobias Lütke. The first is a significant increase in the prices of Basic, Shopify, and Advanced subscriptions.

In addition, we believe that the company will be able to continue to attract customers, including through the introduction of generative AI. So, in mid-July of this year, Shopify announced the launch of a chatbot assistant called Sidekick, which can help business owners with numerous issues and improve business efficiency. This decision will allow independent retailers to enter into stronger competition with e-commerce behemoths such as Amazon (AMZN) and eBay (EBAY).

One of the key factors that have a positive impact on Shopify’s revenue growth is an active R&D policy. Thanks to it, the company remains a leader in the market and launches new services and platforms that increase the efficiency of businesses. Shopify’s R&D spending in Q2 2023 was $648 million, or 38.25% of total revenue, which is exceptionally high in the technology sector during an economic recovery in the US, Europe, Australia, and Japan.

Shopify’s gross margin was 49.29% for the three months ending June 30, 2023, continuing its recovery from Q4 2022, thanks to lower cloud infrastructure costs, inflation, and substantial price increases for subscription plans. We forecast that by the end of 2023, the company’s gross margin will grow slightly and reach 50.5%, and by 2024 this figure will rise to 54.2%, partly due to increased consumer spending.

The company’s earnings per share (EPS) for the second quarter of 2023 was $0.14, a significant increase from the previous year. According to Seeking Alpha, Shopify’s Q3 EPS is expected to be $0.08-$0.25, up 180% from the consensus estimate for Q2 2023. While we believe this is slightly underestimated, our model puts Shopify’s EPS at $0.15.

At the same time, Shopify’s Non-GAAP P/E [FWD] of 188.68x is 701.69% higher than the sector average and 71.99% lower than the average over the past five years, which may indicate that this fast-growing company is undervalued.

At the end of June 2023, Shopify’s total debt was about $1.13 billion, down 18.8% from 2022.

With the company’s total cash and short-term investments of $4.78 billion and growing revenue, we don’t expect Shopify to have difficulty redeeming its convertible senior notes due 2025.

Conclusion

On August 2, Shopify, one of the leading companies in the global e-commerce software market, published its financial results for the second quarter of 2023. These results not only exceeded our expectations, as well as those of analysts, but also showed that demand for Shopify Payments and the company’s other platforms is growing faster than many on Wall Street expected.

Thanks to an aggressive R&D policy, the company is actively expanding the number of services and platforms offered to customers, including the introduction of generative AI. On July 12, 2023, Shopify announced the launch of a chatbot assistant called Sidekick, which can help business owners with numerous issues and improve business efficiency.

We believe that the company’s revenue growth and recovery of margins will continue in the coming years, partly due to the start of the easing cycle in the US and the EU in early 2024, which we expect.

We initiate our coverage of Shopify with an “outperform” rating for the next 12 months.