Easing geopolitical tensions in the Middle East, a more favourable macroeconomic environment, and hopes of a breakthrough in negotiations between the United States and its trade partners have driven the Canadian equity markets higher. The S&P/TSX Composite Index is up 22.4% from its April lows.
Meanwhile, Shopify (TSX:SHOP) has outperformed the broader equity markets by delivering returns of over 61% during the same period. Its solid first-quarter performance, healthy growth prospects, and favourable market conditions have supported its stock price growth. Despite the recent increases, the company trades 12.8% lower than its 52-week high. Therefore, let’s examine its first-quarter performance and growth prospects to determine buying opportunities in the stock.
Shopify’s first-quarter performance
Shopify reported a solid first-quarter performance in May, with its GMV (gross merchandise value) growing 23.8% year over year to $74.8 billion. It marked the seventh consecutive quarter of growth exceeding 20% in GMV. The expansion of its merchant base, driven by the addition of several new customers over the last four quarters, and higher same-store sales growth among existing customers, supported its GMV expansion.
Meanwhile, its top line grew 26.8% to $23.6 billion, marking eight consecutive quarters of revenue growth of above 25%. The strong performance from both its subscription solutions and merchant solutions, which grew 21.3% and 28.9%, respectively, drove its top line. New customer additions and a favourable impact from increased prices and higher variable platform fees drove revenue from the subscription solutions segment. Meanwhile, the expansion of GMV and GPV (gross processing value) amid geographical expansion and increased penetration of its payment solutions boosted its revenue from the merchant solutions segment.
Meanwhile, the company experienced a 100 basis point decline in its gross profit margin during the quarter, to 49.5%. The increase in cloud and infrastructure hosting expenses, as well as a decrease in non-cash revenues from certain partnerships that carry higher margins, weighed on its gross margins. However, 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 total revenue from 47% to 41%.
Supported by top-line growth and a decline in its operating expenses, the company posted an operating income of $203 million, accounting for 9% of its total revenue. It is an improvement from 5% in the previous year’s quarter. Additionally, it generated free cash flows of $363 million, with its free cash flow margin improving 300 basis points from the prior year’s quarter to 15%. Now, let’s look at its growth prospects.
Shopify’s growth prospects
Amid the ongoing trade conflict, Shopify is focusing on facilitating small- and medium-sized businesses to quickly and efficiently adapt and expand their operations. It has added several new features, including product filtering by country, duty calculation, and shipping management, which aid them in cross-border trade.
Additionally, the company continues to expand its payments platform, reaching 39 countries by the end of the first quarter. The company has launched multicurrency payouts in 20 European countries, enabling merchants to accept payments in multiple currencies. Additionally, the platform aims to streamline the onboarding process, enhance security, reduce fees, improve conversion rates, and enhance the buyer’s experience.
Moreover, Shopify is also adopting AI (artificial intelligence) to improve its operating efficiency and develop innovative products. The acquisition of Vantage Discovery could accelerate the development of AI-powered search features. Considering all these factors, I believe Shopify’s growth prospects look healthy.
Investors’ takeaway
Amid strong buying over the last couple of months, Shopify’s valuation has increased, with the company currently trading at NTM (next-12-month) price-to-sales and NTM price-to-earnings multiples of 13.3 and 80, respectively. Although its valuation looks expensive, I believe investors with a three-year horizon can accumulate the stock to reap superior returns.
