Shopify Earnings: Strength Abounds but Expense Growth Guidance Is Concerning

Narrow-moat Shopify reported strong fourth-quarter results, including better-than-expected revenue and meaningfully better profitability relative to our model. Guidance was also a little better than anticipated on the top and bottom lines. We have been expecting meaningful increases in profitability and Shopify has delivered. However, we think our profitability estimates skew below broader investor expectations on our more cautious views on the financial health of consumers, gross margin expansion, and results that have been volatile. We think the negative stock reaction is a function of elevated expectations around margins, as management guided operating expenses to increase in the low-teen percentage area sequentially despite a normal seasonal decline in revenue. Still, the outlook was better than we anticipated, so we continued to refine our near and medium-term profitability assumptions upward, which led us to raise our fair value estimate to $68/CAD 91 per share from $60/CAD 83. After the strong run the shares had throughout 2023, we now see shares as overvalued.