It was a rough earnings report for Shopify (TSX:SHOP) and its shareholders despite a strong quarter that beat out earnings estimates. Yet it wasn’t this quarter that investors seemed concerned about — they’re worried about the future of the company.
Shares of Shopify stock plunged by up to 21% after stating that sales in the second quarter would likely be muted. But that’s not the only thing investors should take away from the company. In fact, it could mean today’s share price is a steal.
Why the drop?
First off, let’s get into the drop itself. Shopify stock’s weak guidance for the second quarter of 2024 primarily revolves around the company’s revenue growth and gross margin expectations. Shopify expects revenue to grow at a high-teens percentage rate on a year-over-year basis for the second quarter. While this still indicates growth, it represents a slowdown compared to the first-quarter revenue growth of 23%.
Furthermore, when adjusting for the impact of the sale of logistics businesses, the year-over-year growth rate is expected to be in the low to mid-20s. This moderation in revenue growth could be attributed to various factors. These include macroeconomic conditions, changes in consumer behaviour, or specific challenges within Shopify stock’s business ecosystem.
Shopify stock also anticipates a decrease in gross margin for the second quarter of approximately 50 basis points. That’s compared to the first quarter of 2024. Gross margin is a key indicator of a company’s profitability. It represents the percentage of revenue retained after accounting for the cost of goods sold. A decline in gross margin suggests factors such as increased costs or pricing pressures, which could impact Shopify’s overall profitability.
Not all bad news
That being said, it certainly wasn’t all bad news. And in fact, there are even benefits coming for the second quarter. This includes the sale of the tech stock’s logistics businesses. This is expected to create a revenue growth headwind of approximately 300 to 400 basis points for the second quarter compared to last year. The sale of these businesses might have been a strategic decision to streamline operations or focus on core competencies. But it does have a short-term impact on revenue growth.
Furthermore, Shopify stock reported a 23% increase in revenue compared to the previous year. This increased to 29% growth when adjusting for the sale of its logistics businesses. This indicates continued robust performance in the company’s core business operations.
There was also strong growth in several other areas. Gross profit increased by 33%, with a gross margin of 51.4%, up from 47.5% in the first quarter of the previous year. This improvement in profitability suggests efficient cost management and effective pricing strategies. Merchant Solutions revenue increased by 20%, driven by growth in gross merchandise volume (GMV) and Shopify Payments. Subscription Solutions revenue also grew by 34%, fueled by an increase in the number of merchants and pricing adjustments on subscription plans.
Finally, free cash flow doubled year over year to US$232 million, with a free cash flow margin of 12%. This indicates strong cash-generation capabilities, providing Shopify stock with financial flexibility for future investments and strategic initiatives.
Bottom line
Overall, despite the stock dropping 21% due to the weak guidance for the second quarter, investors should recognize Shopify’s continued growth, profitability, and cash generation capabilities, along with the company’s commitment to building long-term value for shareholders. In fact, with shares continuing to trade below that three-digit mark, it could be quite the deal on the TSX today.
