Shopify Earnings: Impressive Multiprong Margin Surge Drives Strong Results
Raising our fair value estimate for Shopify stock; shares now fairly valued.
Key Morningstar Metrics for Shopify
- Fair Value Estimate: $60.00
- Morningstar Rating: 3 stars
- Morningstar Economic Moat Rating: Narrow
- Morningstar Uncertainty Rating: Very High
What We Thought of Shopify’s Earnings
Shopify SHOP reported excellent third-quarter results, including better-than-expected revenue and meaningfully better profitability. Guidance was a little better than we anticipated on profitability, but it was a little shy of our revenue assumption.
That said, we anticipate a dramatic increase in profitability in the near term as a result of headcount reductions, price increases on the standard version, and the disposition of the margin-dilutive logistics business. Therefore, our profitability estimates have increased only slightly. We are increasing our fair value estimate to $60/CAD 83 per share from $57/CAD 76. After the roughly 20% spike in Nov. 2 trading, we see the stock as once again fairly valued.
Third-quarter revenue grew 25% year over year as reported to $1.714 billion, ahead of our above-consensus expectations. Normalizing for the sale of the logistics business, revenue expanded 30% year over year. Relative to the prior-year period, subscription revenue grew 29% year over year, while merchant solutions increased 24%. Merchant solutions were in line with our estimates, while subscriptions drove upside. Overall revenue strength was driven by a combination of good merchant growth and performance, the impact of price increases, and the adoption of merchant solutions products like payments, capital, markets, and installments. Offline and Europe also continued to perform very well.
We were impressed by the strong margins and expect the firm to use these expense levels as a new baseline, which was already largely contemplated in our model. In the third quarter, the non-GAAP operating margin was 15.8%, compared with -4.7% a year ago. We see margin strength in the quarter as a result of better revenue, recent headcount reductions, the impact of price increases on the standard Shopify version, the disposition of the logistics business, and measured spending on more discretionary items. Free cash flow was similarly impressive.
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