The Motley Fool

Shopify Smashed Earnings: Why Is it Not Rising?

Image source: Getty Images

On October 29, Shopify (TSX:SHOP)(NYSE:SHOP) reported its Q3 2020 earnings. Overall, the company showed very strong growth across its business. However, the company’s stock proceeded to fall for the next two trading days, before finally rising on Tuesday. Since its earnings call, Shopify stock is still on the negative side.

Does the report indicate anything investors should be wary of? Is Shopify still a good company to hold in your portfolio? I will tackle these questions in this article.

Dissecting Shopify’s earnings report

Although Amazon still holds the largest market share, by a long shot, among retail ecommerce sales in the United States, Shopify was able to hold its second-place position. Currently, the company has a market share of 5.89%. The next closest competitor is eBay with a 5.11% share. The rest of the field is much lower than the two of these companies.

Shopify’s revenue continues to grow at a very strong pace. In Q3 2019, the company reported $390.6 million in quarterly revenue. This year, it reported a quarterly revenue of $767.4 million. This represents a year-over-year growth of 96%!

Shopify’s monthly recurring revenue also skyrocketed this past quarter, as consumers continued to turn to online retail solutions. For Q3 2020, Shopify reported $74.4 million in recurring revenue. This represents a compound annual growth rate of 47% since Q3 2015.

One final note about the company’s revenue is that it continues to become more diversified. In Q3 2019, apps, themes, and domains only accounted for 11% of its revenue. At the same time, 23% of Shopify’s revenue came from Shopify Plus customers and 65% came from its core business (entrepreneurs and small- and medium-sized businesses). In Q3 2020, these numbers were reported to be 20%, 22%, and 59%, respectively. This is great for the company, as Shopify can rely less on a certain area of its business to drive revenue.

The presentation ends with several highlights that Shopify management would like to remind investors of. First, the company continues to have a very strong balance sheet. Although the company is still very much in the high-growth stage, Shopify carries very little debt and emphasizes disciplined capital allocation.

The highlights also mention the fact that Shopify continues to build its partner ecosystem, which will be very hard for competitors to replicate. This allows it to continue to attack this massive market, during a time with increasing penetration.

5 TSX Stocks Under $5

Click here to learn more!

Why is Shopify stock not performing well?

As I mentioned at the open, Shopify stock is still in the red since its earnings report. In fact, it has netted investors about a 0% return over the past four months. However, this is not surprising, considering Shopify stock gained over 200% since hitting its lowest point in March. In the past couple weeks, all growth stocks have seen significant decreases in value, as investors grew wary of the presidential election.

Foolish takeaway

Shopify has been a very strong performer since its IPO. While the stock may need some time to cool off, after a red hot run this year, its business continues to show signs of growth and strength. If you believe Shopify will continue to be a leader in the e-commerce space, then any short-term stagnation or volatility in its stock price should not worry you.

5 Canadian Growth Stocks Under $5

We are giving away a FREE copy of our "5 Small-Cap Canadian Growth Stocks Under $5" report. These are 5 Canadian stocks that we think are screaming buys today.

Get Your Free Report Today

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.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Fool contributor Jed Lloren owns shares of Shopify. David Gardner owns shares of Amazon. Tom Gardner owns shares of Shopify. The Motley Fool owns shares of and recommends Amazon, Shopify, and Shopify. The Motley Fool recommends eBay and recommends the following options: long January 2021 $18 calls on eBay, short January 2021 $37 calls on eBay, short January 2022 $1940 calls on Amazon, and long January 2022 $1920 calls on Amazon.

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.