Despite the volatility caused by Donald Trump’s protectionist policies, the last 12 months were good for the Canadian equity markets, with the S&P/TSX Composite Index rising 18.3%. Meanwhile, Shopify (TSX:SHOP) has outperformed the broader equity markets with returns of 56% over the last 12 months. Its solid quarterly performances and healthy growth prospects have boosted its stock price. Let’s access its recently reported fourth-quarter earnings and growth prospects to determine buying opportunities in the stock.
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Shopify’s fourth-quarter earnings
Shopify posted GMV (gross merchandise value) of $94.46 billion in the fourth quarter, marking 26% growth from the previous year’s quarter. Solid same-store sales growth from existing merchants and new customer acquisitions amid new product launches and geographical expansions boosted its GMV. Its international segment posted a solid GMV growth of 33% amid strong performances across Europe, the Middle East, and Africa.
Supported by GMV growth, increased subscription solutions revenue due to new customer acquisitions, and growing penetration of payment solutions, its top line grew 31% year over year to $2.81 billion. It was the seventh consecutive quarter of above 25% top-line growth. Its gross profits increased by 27%, while its gross margins declined by 150 basis points to 48.1%. Higher spending on cloud infrastructure and lower noncash revenues from specific partnerships weighed on the company’s gross margins.
Moreover, Shopify’s operating expenses declined from 36% of the total revenue last year to 32% amid operating leverage and lower headcount. Amid top-line growth and declining operating expenses, its operating profits increased by 60.9% to $465 million. Also, its operating margin improved from 13.5% in the previous year’s quarter to 16.5%. The company generated healthy free cash flows of $611 million in the fourth quarter, representing 22% of its total revenue. Its free cash flow margins improved sequentially in each quarter of 2024. Now, let’s look at its growth prospects.
Growth prospects
The growing adoption of omnichannel selling has created a multi-year growth potential for Shopify. The company focuses on developing innovative products and services to capture the increasing demand. So, it is strengthening its R&D (research and development) team. This year, it has also planned to prioritize core platform, international, B2B (business-to-business), enterprise, and offline segments.
Further, Shopify’s management projects revenue growth in the merchant solutions segment to outperform subscription solutions this year amid growing penetration of its payment solutions, expanding product offerings, and its ability to drive product adoption. Meanwhile, the company’s management expects its shift towards three-month trials and lack of price increases this year to negatively impact its revenue from the subscription solutions segment.
Amid all these factors, Shopify’s management projects its top line and gross margins to grow by the mid-20s and low 20s in the first quarter of fiscal 2025. Also, the management expects its free cash flow margin to improve from 12% in the first quarter of 2024 to mid-teens. So, its growth prospects look healthy.
Investors’ takeaway
Shopify has delivered impressive returns of 191.2% over the last two years at an annualized rate of 70.6%. The steep increase in stock price has driven its valuation higher, with its next-12-month price-to-sales and price-to-earnings multiples at 13.1 and 74.0, respectively. Despite its higher valuation, I am bullish on Shopify due to its favourable market conditions, growth initiatives, and improved profitability.
