Shopify (TSX: SHOP) reported a healthy first-quarter performance on May 8. Its top line came in at $2.36 billion, beating analysts’ expectations of $2.33 billion. However, the company incurred $682 million in net losses during the quarter, primarily due to equity investment losses of $900 million. The net losses represent a substantial increase from $273 million in the previous year’s quarter. Removing these one-time expenses, its adjusted EPS (earnings per share) stood at $0.25, representing a year-over-year increase of 25%.
Amid these solid performances, Shopify has witnessed healthy buying since reporting its first-quarter earnings, with its stock price rising 9.8%. However, it is still trading at a 21% discount compared to its 52-week high. Let’s examine its first-quarter performance and growth prospects in detail to determine buying opportunities in the stock.
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Shopify’s first-quarter performance
Shopify posted a 23% increase in its GMV (gross merchandise value) to $74.8 billion, marking the seventh consecutive quarter of above 20% growth. The expansion of its merchant base and healthy same-store sales growth among existing customers drove its GMV expansion. Its offline, B2B, and international segments delivered solid performances during the quarter, growing their GMV by 23%, 109%, and 31%, respectively.
Meanwhile, the company’s revenue grew 26.8% to $23.6 billion amid a 21.3% growth in subscription solutions and a 28.9% increase in merchant solutions. The merchant base expansion, favourable pricing, and higher variable platform fees led to the expansion of its subscription revenue during the quarter. The expansion of its GMV and GPV (gross processing value) amid increased penetration and geographical expansion of its payments solutions supported the merchant solutions segment’s revenue growth.
Despite the top-line growth, Shopify’s gross profit margin contracted 100 basis points to 49.5% amid its increased cloud and infrastructure hosting expenses and decline in non-cash revenues from specific partnerships that carry higher margins. Meanwhile, its operating expenses fell from 47% of total revenue in the previous year’s quarter to 41%. The company’s initiatives to develop lean and highly efficient teams across segments and operating leverage helped in lowering its operating expenses as a percentage of revenue.
Meanwhile, Shopify has posted an operating income of $203 million, representing 9% of its total revenue. Its operating margin was a substantial improvement from 5% in the previous year’s quarter. Additionally, the company generated $363 million in free cash flow, with its free cash flow margin at 15%. Its free cash flow margin improved 300 basis points compared to the first quarter of last year. Now, let’s look at its growth prospects.
Shopify’s growth prospects
Amidst the changing macro environment, Shopify focuses on helping small- and medium-sized enterprises adopt and expand their businesses quickly and efficiently. The company has added features that focus on cross-border trade, including buying locally, calculating duties, and managing shipping. Additionally, the company has expanded its payment solutions geographically, reaching 39 countries by the end of the first quarter. The expansion would streamline the onboarding process, reduce fees, enhance security, improve conversion rates, and enhance the buyer’s experience.
Along with these growth initiatives, Shopify also focuses on adopting artificial intelligence (AI) to develop innovative products, strengthen its operational capabilities, and improve efficiency. It has also recently acquired Vantage Discovery, which could accelerate the development of AI-powered search features. Considering the company’s growth initiatives and expanding addressable market, I believe Shopify’s growth prospects look healthy.
Investors’ takeaway
Supported by its solid financial performances and improvement in broader equity markets, Shopify has delivered impressive returns of around 77% over the last 12 months. Meanwhile, the recent uptrend in its stock price has raised its valuation, with its next-12-month (NTM) price-to-sales and NTM price-to-earnings multiples at 12 and 72.2, respectively. Although its valuation looks expensive, I believe it is justified, given its higher growth prospects. Therefore, investors with an investment horizon of over three years can consider buying this stock to reap superior returns.
