Shopify Just Had a Billion-Dollar Quarter. The Stock Dropped.

The company ended 2023 strong, so why is the stock falling?

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Shopify stock falls after earnings

Shopify (TSX:SHOP) stock fell after posting strong Q4 and full-year 2023 earnings. What gives?

Motley Fool Canada analyst Iain Butler breaks it all down in this 5-minute video. (Prefer to read? There’s a transcript below.)

Transcript

Nick Sciple: I’m Motley Fool Canada senior analyst Nick Sciple and this is the “Five-Minute Major” here to make you a smarter investor in about five minutes. Today we’re discussing Shopify’s fourth-quarter and full-year 2023 earnings.

My guest today is Motley Fool Canada Chief Investment Officer Iain Butler.

Iain, thanks for joining me.

Iain Butler: Fun to be here, Nick. Let’s hit Shopify.

Nick Sciple: Always fun to to tackle Shopify’s earnings. Let’s start with the numbers. Fourth-quarter numbers look pretty strong; revenue up 30% year-over-year.

That’s when you exclude the divestment of the logistics business they did last year.

This is the company’s largest revenue quarter in history.

Gross profit up 33%; the first quarter ever where the company has delivered more than $1 billion in gross profit.

Free cash flow margin came in at 21%.

Looking a little bit deeper into the business:

Shop Pay still is performing well. It processed $45 billion in gross merchandise
value in the quarter; that’s up 32% year over year. It’s now being used on 60% of transactions
on the platform.

Offline is growing nicely as well, up 28% year over year. You look at all those numbers, not a lot to complain about.

However, the stock closed down over 10% in the day following that earnings release.

Iain, what’s the beef?

Iain Butler: I’m actually going to quickly dial it back to the end of January when Shopify announced that they were upping their prices across much of their product suite. Frankly that was the biggest item in my mind for the business long-term because it just goes to show what a strong competitive position Shopify has established amongst its customer base. I think that’s going to be really important to watch
play through over the years.

However, in the moment, we had all these good numbers thrown our way and then all of a sudden the stock opened way down. Now, it was on a day where the whole market was way down, seemingly on the back realizations or pontifications that the Fed may or may not cut rates as much as once expected by the masses. Maybe four cuts instead of six or something like that, so that was probably part of the tough day that Shopify had.

However, if we were to nitpick, I suppose, perhaps first-quarter guidance came in light.

They’re guiding for 20% revenue growth, maybe 25% if you back out some of their divested logistics businesses.

Gross margins, though, expected to expand.

Guidance is calling for low teens increasing operating expenses.

I don’t know, growing business. I think you’ve got to kind of expect operating expenses to keep going higher. That’s kind of what the game is at this stage of the life cycle for Shopify.

So the forecast implies adjusted operating income of $178 million. Now that did come in well below consensus, but as I always like to say maybe consensus was wrong. They guessed wrong, and that’s just the way it goes.

But I think it’s really important too that Shopify is becoming a free-cash-flow-generative company. And again, that free cash flow margin is expected to continue as it did in the most recently reported results.

So I don’t get too worked up about what happened to the stock yesterday. I also don’t get too worked up about a quarter’s guidance or even a year’s guidance for this company or really any company.

I like to think long-term about this and every company. In the context of our experience with Shopify, we recommended this stock actually way back in March 2016 for our Stock Advisor Canada members. It’s up to the tune of about 3,000% since that recommendation and we’ve sort of juggled similar statistics all the way along.

It’s always been high on the traditional valuation metrics, trading when we first recommended
at around 10 times revenues. That figure, when we recommended it in February 2019, was at 20 times revenues. It went as high as 70 times revenues at its peak back in February 2021, which has proven to be a lot. (Laughs) The stock is not back to where it was in February, back at those lofty multiples.

However, it’s in the context of where it’s been historically. Shopify trades at about 14 times trailing revenues right now.

And again, it’s a more profitable business that it’s ever been. It’s not growing at the same rate, but in terms of magnitude, it’s continuing to clip along with all the opportunity in the world.

So, from a stock perspective, I don’t get too worked up about yesterday’s reaction. I just continue to look long-term and the business should continue to drive great returns for our shareholders.

Nick Sciple: Yeah. It’s a growth business continuing to invest in growth. That’s what you’re looking for in a company like Shopify.

With that, we’re out of time for this edition of the Five-Minute Major. We’ll see you next time.

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.

The Motley Fool has positions in and recommends Shopify. The Motley Fool has a disclosure policy.

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