Bolstered by easing trade tensions, with the United States announcing trade agreements with the United Kingdom and China, the global equity markets have witnessed upward momentum over the last few days. The S&P/TSX Composite Index is up 14.1% compared to the previous month’s lows. Amid the improvement in investors’ sentiments, I am bullish on Shopify (TSX:SHOP), which reported a healthy first-quarter performance last week. Let’s look at its first-quarter performance and growth prospects in detail.
Shopify’s first-quarter performance
Shopify posted a GMV (gross merchandise value) of $74.8 billion in the first quarter, representing a 23% increase from the previous year and a seventh consecutive quarter of above 20% growth. An expanding merchant base and same-store sales growth of its existing merchants boosted its GMV. The company witnessed strong performance from its B2B business, which grew by 109%, and the international segment, which rose 31%. Meanwhile, its topline grew 26.8% during the quarter, with the revenue from subscription and merchant solutions growing by 21.3% and 28.9%, respectively.
An expanding customer base, favourable pricing changes, and higher variable platform fees boosted its revenue from subscription solutions. Meanwhile, a higher GMV and GPV (gross processing value) amid increased penetration and expansion of Shopify payments drove its revenue from merchant solutions. Although its operating profits increased 22.1%, its operating margin contracted 90 basis points to 49.1%. The increased investments in cloud infrastructure to support volume growth and geographic expansion, lower non-cash revenues, and the expansion of its partnership with PayPal led to a decline in its gross margin.
Meanwhile, Shopify incurred operating expenses of $966 million during the quarter, forming 40.9% of the total revenue – a substantial improvement from 46.8% in the previous year’s quarter. The company’s disciplined spending across R&D (research and development), marketing, and general and administrative expenses lowered its operating costs. However, the company incurred net losses of $682 million during the quarter due to a decline of over $900 million in equity investments. However, removing these one-time or extraordinary expenses, the company’s adjusted EPS (earnings per share) stood at $0.25, representing a 25% increase from the previous year’s quarter.
Shopify’s growth prospects
Amid a changing macro environment, Shopify is helping small and medium-scale enterprises adopt and expand their businesses quickly, thus driving the demand for its products and services. The company is also developing innovative products that facilitate cross-border trade through features such as buy local, duty calculations, and shipping. Further, the company is expanding its Shopify Payments to new markets and simplifying its onboarding process to increase its penetration, which could continue to drive its GPV.
Shopify has adopted artificial intelligence (AI) to strengthen its operational capabilities and improve operating efficiency. It is also developing customer-facing AI-powered products to enhance the user experience and drive businesses. The e-commerce solutions provider recently acquired Vantage Discovery, which could aid the company in developing several new features. Amid these growth initiatives and expanding addressable market, I expect the uptrend in Shopify’s financials to continue.
Investors’ takeaway
Amid improving investor sentiment, Shopify has witnessed strong buying over the last few weeks, with its stock price rising 28.9%. Despite the recent surge, it still trades at a 30.3% discount compared to its 52-week high. Considering its healthy growth prospects and discounted stock price, I expect the uptrend in Shopify to continue making it an excellent buy.
