Why Shopify (TSX:SHOP) Stock Jumped 9% After Earnings

Shopify (TSX:SHOP)(NYSE:SHOP) stock climbed after earnings, yet the company missed earnings estimates. What should investors think?

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Shopify (TSX:SHOP)(NYSE:SHOP) released its third-quarter earnings Thursday morning, sending shares up 7% in early trading. However, it comes after Shopify stock missed revenue estimates for the first time in five years.

What happened?

While shares of Shopify stock are up, originally, the stock started to fall, as the company missed estimates. Analysts were disappointed with the results. Shares are likely to be volatile in the short term following the first time the company missed revenue estimates in five years.

Shopify stock reported third-quarter profit of US$1.15 billion, with revenue rising 46% year over year. This resulted in diluted earnings per share of US$9 compared to US$1.54 the year before. Revenue totaled US$1.12 billion — an increase from US$767.4 million a year before. This was still down from the estimated US$1.41 billion in revenue by 20%.

Meanwhile, gross merchandise volume (GMV) achieved US$41.8 billion for the quarter — an increase of 35% for Shopify stock.

“It took 15 years for our merchants to get to $200 billion in cumulative GMV, and just 16 months to double that to $400 billion,” said Harley Finkelstein, Shopify’s president.

Still, subscription solutions climbed along with merchant solutions revenue compared to the same quarter last year. But growth is slow, and that’s starting to scare Motley Fool investors and others away from Shopify stock.

So what?

The amount of growth in merchant solutions will be hard to achieve for Shopify stock. Even as it takes on larger clients, it’s simply unable to hold onto the wave of smaller merchants that once took over its revenue.

“As the world begins to return to some normalcy and the extreme levels of online shopping over the past year make way for more in-person retail and experiences, e-commerce’s share of overall retail has reset lower than the peak last year,” said Amy Shapero, chief financial officer.

In the future, Shopify stock looks to achieve more normalized growth. And while that’s less exciting for Motley Fool investors, it’s more stable — especially as pandemic restrictions continue to ease.

Now what?

Shopify stock still wasn’t able to give much of an outlook moving ahead, given the unease with the pandemic. However, management remains confident that the fourth quarter will “contribute the largest share of full-year revenue.” That’s thanks to Black Friday and Cyber Monday, and the hope for an ease in supply chain delays and increased costs.

Further, Shopify stock expects GMV to grow substantially faster than the rest of the commerce market. The company continues to plan to use profit to reinvest back into the business. They expect full-year 2021 adjusted operating income to be above what was achieved in 2020.

Shares of Shopify stock are up 9% after the report and 21% year to date. Still, it remains down from its all-time high just past $2,000 per share. Analysts put its one-year potential share price at $1,965, not taking into account Thursday’s earnings report.

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.

Fool contributor Amy Legate-Wolfe owns shares of Shopify. The Motley Fool owns shares of and recommends Shopify. The Motley Fool recommends the following options: long January 2023 $1,140 calls on Shopify and short January 2023 $1,160 calls on Shopify.

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