The Motley Fool

Shopify Stock: 3 Key Takeaways From its Q1 Results

Image source: Getty Images

Shares of e-commerce giant Shopify (TSX:SHOP)(NYSE:SHOP) gained close to 7% yesterday. It touched a record high of $1,043 and closed trading at $1,034.42. Investors were buoyed after the company announced first-quarter results that crushed Wall Street estimates.

Shopify reported revenue of US$470 million with adjusted earnings of US$0.19. Comparatively, analysts expected revenue of US$443.11 million and an EPS loss of US$0.18 in the March quarter. So, what drove company sales higher in Q1?

Gross merchandise value soar in Q1

Shopify’s merchant solutions business experienced revenue growth of 57% year over year. Sales in this segment rose to US$282.4 million, driven by growth in gross merchandise value (GMV). In Q1, the company’s GMV was up 46% at US$17.4 billion. Merchant solutions revenue accelerated for the second consecutive quarter.

Its subscription business saw a 34% growth in sales driven by growth in MRR (monthly recurring revenue).

Shopify benefits from the secular shift to e-commerce

The ongoing COVID-19 pandemic has resulted in lower consumer spending. The traditional retail sector has been completely decimated due to lockdowns. This has accelerated the shift to online shopping and contributed to Shopify’s stellar growth.

Shopify is well poised to help businesses make the transition from brick-and-mortar to e-commerce. It introduced several initiatives to support small and medium businesses in these uncertain times. Shopify extended its 90-day free trial for new standard-plan signups. It also provided capital to businesses helping them through short-term liquidity issues. The e-commerce giant introduced local in-store pickup and delivery as well.

We can see here that Shopify continues to expand its customer base and is successfully attracting large businesses across verticals.

The macro-environment remains uncertain

While Shopify has crushed consensus estimates once again, it withdrew guidance for 2020 last month. Its top-line growth continues to grow at a robust pace currently. However, a lot depends on the impact and duration of the COVID-19.

The business shutdowns have already driven unemployment rates in Canada close to 8% as of March 2020. There are fears of an extended global recession, which might impact Shopify sales in the upcoming quarters.

Shopify will benefit from the shift in consumer spending habits as people shift to online buying for discretionary and non-discretionary goods. But it is also dependent on the ability of brick-and-mortar stores to accelerate this transition. For this, Shopify aims to redirect spending from sales and marketing towards product initiatives and increase its merchant base.

Shopify stock is trading at sky-high valuations

Shopify stock has been on an absolute tear recently. It has gained a staggering 128% since March 16 and is now up 4,200% from its IPO price. Shopify is just shy of becoming the most valued company in Canada. It has a market cap of $120.81 billion at the end of May 6, 2020, just below Royal Bank of Canada’s market cap of $121.44 billion.

While Shopify’s long-term prospects look exciting, investors should be concerned about its sky-high valuations. It has a forward price-to-sales multiple of above 40. This is significantly higher compared to peer tech stocks.

This Tiny TSX Stock Could Be the Next Shopify

One little-known Canadian IPO has doubled in value in a matter of months, and renowned Canadian stock picker Iain Butler sees a potential millionaire-maker in waiting...
Because he thinks this fast-growing company looks a lot like Shopify, a stock Iain officially recommended 3 years ago - before it skyrocketed by 1,211%!
Iain and his team just published a detailed report on this tiny TSX stock. Find out how you can access the NEXT Shopify today!

Click here to discover how!

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Tom Gardner owns shares of Shopify. The Motley Fool owns shares of and recommends Shopify. Fool contributor Aditya Raghunath has no position in any of the stocks mentioned.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.