CA - Shopify: New Payment Method And Cost Control Draw Attention

2023-08-24 09:10:09 ET

Summary

• Shopify has recently introduced a new payment method, Solana Pay, and this is a sound decision considering survey results pointing to the increased popularity of cryptocurrency payments.
• Shopify delivered a massive earnings beat for the recent quarter, and this is largely attributable to the company's success in managing expenses.
• I maintain my Buy rating for SHOP stock as I have been impressed with the company's recent actions relating to the Solana Pay integration and cost optimization.

Elevator Pitch

I continue to rate Shopify Inc. ( SHOP ) stock as a Buy.

With my prior December 12, 2022 update , I highlighted that "the market is too pessimistic about Shopify's 2023 outlook." I was proven to be right, considering SHOP's recent financial and share price performance. Shopify's Q2 2023 bottom line came in +181.1% above expectations, while the company's stock price rose by +47.8% (source: Seeking Alpha price data) following the publication of my article towards the end of last year.

The recent Solana ( SOL-USD ) Pay integration and SHOP's focus on expense optimization have drawn investors' attention. In this latest write-up, I outline my favorable opinion of Shopify's efforts to leverage on the popularity of cryptocurrencies and drive down costs. Taking into consideration these factors, I am sticking to my existing Buy rating for SHOP.

Solana Pay Is New Payment Method For SHOP

In its August 23, 2023 press release , Shopify announced that "Solana Pay, a decentralized, open-source, peer-to-peer payments protocol built on Solana by Solana Labs" is currently a "new payment option" on SHOP's platform allowing for "direct payment settlement of USD stablecoins ( USDC-USD )."

The List Of Payment Methods Linked To Cryptocurrencies That Are Accepted On The Shopify Platform

The market responded positively to this latest development for SHOP, as Shopify's stock price went up by +5.1% from $53.96 as of August 22 to close at $56.73 at the end of the August 23 trading day. I think that there are good reasons for investors' favorable opinion of Solana Pay's integration as evidenced by SHOP's share price outperformance on August 23.

A greater focus on cryptocurrency payments for Shopify is aligned with market trends.

An October 2022 survey conducted by PYMNTS and BitPay found that "26% (of consumers) would switch merchants just to shop where it (cryptocurrency) is accepted." Separately, Deloitte published a research report in June last year highlighting that 87% of merchants in the US acknowledge that "organizations currently accepting digital currencies have a competitive advantage." Deloitte's research also noted that more than half of US merchants surveyed by the firm have allocated more than a million dollars to initiatives facilitating payments in the form of digital currencies. News portal Protocol's January 2022 survey of small US businesses indicated that 28% of its survey respondents "already accept cryptocurrency payments" and another 27% of them "plan to accept it in the next year."

Specifically, Solana claimed on its website to have over 11.5 million active accounts and facilitated in excess of 213 billion transactions at a cost of $0.00025 on average per transaction. These metrics suggests that Shopify's recently disclosed partnership with Solana represents a meaningful move for SHOP in terms of capitalizing on growing demand for cryptocurrency payments.

Shopify's Expense Control Efforts

At the beginning of this article, I mentioned that SHOP's turnaround from a normalized net loss per share of -$0.03 in Q2 2022 to a positive non-GAAP adjusted EPS of +$0.14 for Q2 2023 was way better than what the market expected (+$0.05).

Shopify's emphasis on improving profit margins and its good cost management were what drove an earnings beat for the company in the second quarter of the year.

SHOP stressed at the Morgan Stanley ( MS ) TMT Conference on March 8 this year that the company is "very focused on profitability." At the earlier Raymond James ( RJF ) 44th Annual Institutional Investors Conference on March 7, Shopify mentioned that putting a cap on "headcount growth", "automation", and "shorter payback periods" relating to "sales and marketing" are some of the expense control and margin expansion initiatives that it was working on.

In May 2023, Shopify revealed that it plans to cut its number of employees by 20% . At its recent Q2 2023 earnings briefing in early August, SHOP highlighted that it is continuing with efforts "assessing where our marketing dollars are having the most impact" and "automating where possible."

The company's prioritization of profitability and its expense control measures have paid off based on an analysis of SHOP's key metrics. The selling & marketing costs-to-revenue and general & administrative costs-to-revenue ratios for Shopify decreased by -630 basis points YoY and -230 basis points YoY to 18.9% and 7.7%, respectively in Q2 2023.

Shopify's shares were up by +74.7% in the past year, and I am of the opinion that SHOP's positive stock price momentum can be sustained as the company expands its profit margins in the mid to long term. As per S&P Capital IQ's consensus data, the market forecasts that SHOP's EBIT margin will potentially increase from 8.0% in FY 2023 to 13.5% in FY 2025 before rising to 19.3% for FY 2027. The positive effects of operating leverage and ongoing cost cutting efforts are the key factors expected to be supportive of higher profit margins for SHOP in the long run.

Closing Thoughts

My Buy rating for Shopify remains intact. SHOP's latest move to include Solana Pay as a new payment method is expected to be viewed favorably by both consumer and merchants. Separately, Shopify has sent a strong signal that the company has profitability as a top priority, taking into account its focus on automation, headcount optimization, and marketing expense reduction.

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