Why Is Shopify (SHOP) Up 19.5% Since Last Earnings Report?

A month has gone by since the last earnings report for Shopify (SHOP). Shares have added about 19.5% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Shopify due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Shopify Tops Q4 Earnings & Revenues

Shopify Inc. delivered fourth-quarter 2018 adjusted earnings of 26 cents per share outpacing the Zacks Consensus Estimate by 5 cents. Moreover, the figure soared 73.3% year over year.

Total revenues surged 58% from the year-ago quarter to $343.9 million, comfortably surpassing the Zacks Consensus Estimate of $327 million. The figure also fared better than management’s guided range of $315-$325 million.

The top line benefited from a diversified expanding merchant base. The company continues to launch a number of merchant-friendly applications to meet the requirements of a dynamic retail environment, in turn bolstering its merchant base.

Quarter in Detail

Subscription Solutions revenues (38.8% of total revenues) surged 42% to $133.6 million driven by persistent growth in Monthly Recurring Revenue (“MRR”) aided by the addition of several new merchants.

As of Dec 31, 2018, MRR was $40.9 million, up 37% from the year-ago quarter figure of $29.9 million. Shopify Plus accounted for $10.4 million representing 25% of MRR compared with 21% in the quarter ended Dec 31, 2017.

Merchant Solutions revenues (61.2%) advanced 63% to $210.3 million, primarily driven by growth in GMV which gained 54% from the year-ago quarter to $14 billion.

In fact, Shopify platform garnered GMV of approximately $1.5 billion in the Black Friday-Cyber Monday period of four days. Notably, year-ago GMV figure in the same period stood at $1 billion.

Management noted that Shopify merchants added approximately 40 million products to their shops in the reported quarter.

Robust performance of Shopify Payments, Shopify Shipping and Shopify Capital also aided growth.

Shopify Capital advanced $71.8 million cash to merchants in the reported quarter, registering growth of 81% compared with $39.7 million in the year-ago quarter. Notably, since the launch of Shopify Capital, cumulative merchant cash advances have grown to almost $447 million, out of which $92 million was outstanding as on Dec 31, 2018.

Shopify Shipping witnessed robust adoption in the fourth quarter. The offering is being leveraged by almost 40% of total eligible merchants across the United States and Canada.

However, it is to be noted that GMV growth is declining. In the first, second and third quarter, GMV registered a year-over-year increase of 64%, 56% and 55%, respectively.

Gross Payments Volume (“GPV”) came in at $14 billion, accounting for 41% of GMV processed in the fourth quarter, up from $3.5 billion (39%) in the prior-year quarter.

Purchases from merchants’ stores from mobile devices witnessed 78% of traffic and garnered 66% of orders for the quarter ended Dec 31, 2018, up from 73% and 61%, respectively, reported in the year-ago quarter.

In the reported quarter, the company introduced Shopify Payments in Spain.

Operating Details

Non-GAAP gross profit surged 53.4% year over year to $186.4 million primarily on the back of robust performance of Shopify Shipping and Shopify Capital.

Non-GAAP gross margin contracted 100 basis points (bps) from the year-ago quarter to 54%. The margins were impacted by the risk posed by strained Subscription Solutions margins on account of transition to cloud.

Non-GAAP operating expenses surged 51.4% year over year to $166.4 million. Non-GAAP operating expenses as a percentage of revenues contracted 100 bps to 48%.

Adjusted operating income of almost $20 million soared 72.4% from the year-ago quarter. Notably, management had anticipated adjusted operating income to be in the range of $16-$18 million. Adjusted operating margin expanded 100 bps on a year-over-year basis to 6%.

Balance Sheet & Cash Flow

Shopify ended the reported quarter with cash, cash equivalents and marketable securities balance of $1.97 billion compared with $1.58 billion recorded at the end of the third quarter. Management attributes the increase to contribution from the sale of Class A subordinate voting shares as part of public offering which was concluded in December 2018.

The company provided cash from operations of $9.3 million for 12 month period ended Dec 31, 2018, compared with $7.9 million reported in the year-ago period.

Notable Developments Aid Financial Performance in 2018

For full year 2018, Shopify reported adjusted earnings of 38 cents per share which soared 153.3% over 2017. The Zacks Consensus Estimate was pegged at 32 cents.

In 2018, revenues increased 59.74% over 2017 to $1.073 billion, wherein Subscriptions Solutions and Merchant Solutions contributed 43.3% and 56.7% to total revenues, respectively. The Zacks Consensus Estimate for sales was pegged at $1.06 billion.

In a bid to make the platform more merchant friendly, Shopify is working on extending language capabilities beyond English. The focus on local languages is helping in bolstering international presence. We believe this inclusive move will boost engagement and consequently increase adoption going forward.

In fact, Shopify reported merchant base of 24% from outside of core geography (with significant non-English-speaking population) in 2018, comparing favorably with 21% in 2017. Notably, Shopify has introduced seven accessible local language capabilities on its platform to date, including English, Brazilian Portuguese, Japanese, German, Spanish, French, and Italian.

Shopify is also benefiting from introduction of Dynamic Checkout, Centralized Marketing Dashboard, Fraud Protect and Shopify Ping solutions. The launch of Shopify Ping has made it easier for merchants to process payments, ship products and secures financing through messaging for their working capital needs.

The company also partnered with Google to empower physical stores with enhanced security. The company provides Google Wi-Fi routers and Nest cam hardware across its Hardware Stores, to around 70,000 point-of-sale merchants. This aids businesses to monitor their physical outlets leveraging the Shopify dashboard, consequently streamlining management processes.

The latest merchant friendly applications and innovative initiatives to enhance visibility across physical outlets along with exploring new markets are anticipated to significantly expand merchant base, going ahead.

In fact, management noted that merchants on average became more successful on Shopify, as number of merchants with GMV exceeding $1 million grew 58% in 2018.

Moreover, management remains positive about the company’s expanding partner ecosystem that aids it to identify and reach merchants who are otherwise inaccessible. The total number of apps registered in the App store amount to more than 2,500. More than 18,000 partners referred merchants to Shopify in the past 12 months.

For 2018, GMV of $41.1 billion surged 56% over 2017. Notably, revenues of both Shopify Shipping and Shopify Capital have “together doubled” year over year in 2018.

In the fourth quarter, Shopify also announced the acquisition of TicTail, a Swedish e-commerce company, per a report by Financial Post. However, the financial terms of the deal have been kept under wraps.

This move is a clear indication of Shopify’s strategy of increasing initiatives to penetrate international markets, which is a positive. We believe the buyout will enable the company to bolster growth prospects and improve competitive position against the likes of Wix, and other peers.

Further, Shopify opened its first brick-and-mortar store in Los Angeles, CA. The store is staffed with a panel of experts dubbed as the “Gurus” to guide both the existing and prospective merchants through its robust product and services portfolio.We believe it was a smart move to time the inauguration with holiday season.

At the end of 2018, the company had more than 820,000 merchants on Shopify platform compared with 609,000 merchants reported in 2017.

Guidance

For first-quarter 2019, Shopify projects revenues in the range of $305-$310 million.

For full-year 2019, management projects revenues in the range of $1.46-$1.48 billion

Management expects adjusted operating income for fiscal 2019 to be in the range of $10 million to $20 million.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -128.57% due to these changes.

VGM Scores

Currently, Shopify has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of F on the value side, putting it in the fifth quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Shopify has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.

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