Shopify (SHOP: $104, up $12 – 13%)
August 2, 2017
Canadian e-commerce platform Shopify soared after beating analysts’ revenue estimates for a ninth quarter in a row, boosting the forecast for the current quarter and signing up a record number of new merchants. The second-quarter earnings report yesterday reaffirmed the company’s reputation as a stock market darling. The shares pushed Shopify’s market cap to more than $10 billion.
The company booked $152 million in sales, beating the average analyst estimate of $144 million and its own forecast of $143 million, which marked 75% growth from the prior year quarter. Adjusted operating loss -- which excludes stock-based compensation expense -- was $3 million, or 1.9% of revenue, versus $3.2 million, or 3.7% of revenue, in the prior year period.
Some analysts, from firms including Royal Bank of Canada and Goldman Sachs, have lowered their ratings on the stock recently, after such gains have made it one of the most expensive software stocks. However, while Shopify doesn’t yet turn a profit, this quarter’s loss of one penny was about as close to breakeven as it gets.
Shopify hit 500,000 customers during the quarter, with clients ranging from individuals selling handmade goods to web stores for major brands like Budweiser and Tesla. This was up from 300,000 a year ago. Wow. Chief Executive Officer Tobi Lutke said “500,000 merchants is just such a crazy number. I have lots of stories about being laughed out of VC offices because they told me the entire addressable market for my company was 40,000 stores.”
Shopify’s growth comes as more retail spending shifts online from physical stores, prompting a new wave of brick-and-mortar bankruptcies. The company is adding and growing new revenue streams, such as giving loans to its customers to help them grow and poaching bigger, more established customers from competitors.
The number of merchants shows growth of 67% from the same period last year. Average annual growth since 2012 has been 70%. Keeping up such a rapid pace will become harder though, CEO Lutke has said repeatedly.
BMR Take: When we look at the core building blocks of how this company is advancing we’re of the view that its growth potential of Total Addressable Market (TAM) is expanding. In addition, we see opportunities in international, in new merchant solutions and apps, and building scale with Shopify Plus, the company’s enterprise-focused solution. In our view, the valuation is supported by the long runway and expanding TAM given Shopify’s lower relative market share, still less than 5%. We reiterate our bullishness on the stock. The stock is currently trading at about 9 times the estimate of next year’s sales. This valuation is rich but could still move higher.
We added the stock four months ago at $73 so we are up 43% in that short time frame. The $90 Target was obliterated today – we purposely did not raise it over the weekend. We wanted to see how revenues looked. Needless to say we are quite pleased. We hereby raise our Target to $115 and our Sell Price from $65 to $93.
