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Shopify Earnings: Impressive Multiprong Margin Surge Drives Strong Results

Raising our fair value estimate for Shopify stock; shares now fairly valued.

The company logo hangs on the Ottawa headquarters of Canadian e-commerce company Shopify.

Key Morningstar Metrics for Shopify

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.

Shopify Stock Price

Data as of Source: Morningstar Direct.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Author

Dan Romanoff

Senior Equity Analyst
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Dan Romanoff, CPA, is a senior equity research analyst on the technology, media, and telecommunications team for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He covers software.

Before Joining Morningstar in 2019, Romanoff spent 12 years in buy-side equity research covering the technology and telecommunications sectors, most recently at Holland Capital Management. Prior to that, he spent five years in sell-side equity research as an associate analyst at UBS and a senior analyst at Credit Suisse covering various areas within technology, including hardware, software, and semiconductors. Romanoff also has worked as an auditor and in valuation services for major public accounting firms.

Romanoff holds a bachelor’s degree in accountancy and a Master of Business Administration in finance, both from the University of Illinois at Urbana-Champaign. He also holds the Certified Public Accountant and Accredited in Business Valuation designations.

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