WIX - Shopify Q3 Earnings: Let It Rip And Fall

2023-11-05 12:00:00 ET

Summary

• Shopify's FQ3 2023 results have turned out as expected, with the robust consumer spending contributing to its expanded GMVs and GPVs.
• The same trend has also been reported by multiple e-commerce and fintech companies, supporting the resilience of e-commerce and online payments platforms.
• These have contributed to Shopify's expanding top and bottom line expansions, with the consensus forward estimating sustained growth through FY2025.
• However, with the stock suddenly rallying over the past two days, we fear the same rip and plunge may occur again, as it has since the FQ4 2022 earnings call.
• We believe that Mr. Market may be waiting for Shopify to slowly grow into its premium stock valuations, with it likely to trade sideways for a little longer.

We previously covered Shopify ( SHOP ) in August 2023, discussing management's right decision to shed its logistics segment while raising its subscription prices, due to the potentially accretive impact on its gross margins.

We had believed that these efforts might accelerate the company's path to profitability, way earlier than the consensus FY2025 estimates.

However, these had also contributed to the stock's rally then, with us preferring to rate the stock as a Hold (Neutral) while reiterating our previous buy recommendation of low $40s for an improved margin of safety.

In this article, we will be discussing SHOP's excellent FQ3 '23 results, with its profit margins sustainably expanding as hypothesized, with its performance metrics implying sticky offerings and robust consumer demand.

We shall discuss further.

SHOP Delivered FQ3'23 As Hypothesized

SHOP has delivered a double beat FQ3'23 performance , with revenues of $1.71B (+1.1% QoQ/ +24.8% YoY) and adj EPS of $0.24 (+71.4% QoQ/ +1300% YoY).

SHOP's Market Share in the U.S. eCommerce Usage Distribution

Perhaps this is also attributed to SHOP's leadership in the eCommerce Usage Distribution in the U.S. at 2.83M websites as of October 16, 2023, compared to 2.69M in August 2023 and 2.93M in February 2023.

Combined with the raised subscription prices, it is apparent that the company has been able to successfully monetize its extremely sticky offerings, as witnessed in the expanding Monthly Recurring Revenue [MRR] to $141M ( +1.4% QoQ / +31.7% YoY ).

This is on top of the growing demand for the higher-tiered Shopify Plus, with it contributing $44M in MRR by the latest quarter (+7.3% QoQ/ +25.3% YoY).

The reason to SHOP's success is likely also attributed to its multi faceted headless commerce solutions with flexible customizations in both front-end and back-end, across different platform sizes and price points.

This is on top of its AI-enabled productivity/ content generation tools, its payment solutions with Shopify Payments through multiple payment partners, logistic partners (including Flexport and Amazon ( AMZN )), expanded offerings to include physical retail through scalable platforms and Point of Sale offerings, and early preview of Audiences (an advertising tracking tool) in partnership with tech giants such as TikTok ( BDNCE ), Snap ( SNAP ), Meta ( META ) and Google ( GOOG ).

From the above developments, it is apparent that the management has been taking its unified commerce approach very seriously, while expanding its TAM for both existing and new merchants.

Perhaps this explains why the consumer demand for SHOP's services across e-commerce platform and payment services remains robust, with the Gross Merchandise Volume [GMV] of $56.2B (+2.1% QoQ/ +21.6% YoY) and Gross Payments Volume [GPV] of $32.8B (+3.4% QoQ/ +31.2% YoY) indicating the continued strength in consumer spending thus far.

The same has been suggested by the leader of e-commerce segment, with AMZN recording net global sales of $120.01B ( +6.9% QoQ / +12.6% YoY) and fintech leader, with PayPal's ( PYPL ) expanding Total Payment Volume [TPV] of $387.7B ( +2.9% QoQ / +15% YoY ).

As a result, we are cautiously optimistic that SHOP may be able to sustain its excellent top and bottom line growth ahead, especially aided by the Buy With Prime integration from August onwards, attributed to the second Amazon Prime day on October 10th-11th and holiday sales through December 2023.

This is for so long that the management maintains a tight leash over the COGS at $813M (-5.3% QoQ/ +15.4% YoY) and operating expenses at $779M (non comparable due to logistics divestures, -31.1% QoQ/ -22.7% YoY) by the latest quarter, on top of the FY2023 planned capital expenditure at $45M (-10% YoY).

These efforts have already directly contributed to SHOP's expanded gross margins to 52.6% (+3.3 points QoQ/ +4.1% YoY) and adj operating margins to 7.1% (-1.5 points QoQ/ +32.4 YoY).

This is on top of it being effectively self sufficient, with Free Cash Flow generation of $276M (+ 184.5% QoQ/ +221% YoY) and margins of 16.1% (+10.4 points QoQ/ +26.9 YoY).

The improved profitability also builds upon SHOP's robust balance sheet with cash/ short-term investments of $4.91B (+2.7% QoQ/ inline YoY), while allowing the company to generate a robust annualized interest income of $252M (+8.6% QoQ/ +215% YoY) from the elevated interest rate environment at the same time.

Impressive results, all in all.

So, Is SHOP Stock A Buy , Sell, or Hold?

SHOP Valuations

For now, SHOP's FWD P/E valuation has moderated to 86.68x, down from its 1Y mean of 129.78x and 5Y mean of 638.93x, though still with a massive baked-in premium when compared to the sector median of 20.93x.

The stock still trades at a notable premium as well, compared to the its e-commerce SaaS peers, such as Wix.com ( WIX ) at 23.83x and Squarespace ( SQSP ) at 27.71x.

Interesting fact, SHOP's FQ3'23 outperformance has also indirectly contributed to the stock recoveries observed in WIX and SQSP over the past two days, with the two SaaS companies only expected to report earnings by the second week of November 2023.

The Consensus Forward Estimate

Perhaps part of the optimism is attributed to the promising consensus forward estimates, with SHOP expected to generate a robust top and bottom line CAGR of +21.1% and +216.7% through FY2025, compared to its top-line expansion at a CAGR of +55.9% between FY2016 and FY2022.

The company has also achieved economy of scale, while generating sustainable adj EPS and Free Cash Flow profitability.

SHOP 1Y Stock Price

The strategic combination of the above factors have directly contributed to SHOP's extreme rally of +23.2% in the day after the FQ3'23 earnings call .

However, here is where things may be uncertain indeed. It remains to be seen if the stock may be able to sustain this outburst.

With the macroeconomic outlook still uncertain, no pivot in sight, and the Fed expecting a normalized economy only by 2026 , we believe that SHOP's current recovery may not be last over the next few quarters, with Mr. Market still relatively pessimistic .

The same trend has also been observed over the past few quarters, with the stock unable to hold on to its gains after the exemplary FQ4'22, FQ1'23, and FQ2'23 earning calls , with a similar profit taking likely to occur over the next few weeks.

As a result of the potential volatility, we do not recommend anyone to chase the rally here, especially due to SHOP's inflated stock valuations. Investors may be better off waiting for better entry points, preferably at its previous support levels of $45 for an improved margin of safety.

Even then, they may want to size their portfolios accordingly, since we believe that Mr. Market may be waiting for the company to slowly grow into its premium stock valuations, with it likely to trade sideways for a little longer.

This is until Mr. Market is convinced about SHOP's profitable growth trend and the eventual reversal of stock market sentiments. Only time may tell.

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