Shopify (TSX:SHOP) posted an impressive second-quarter performance earlier this month, beating analysts’ top- and bottom-line expectations. Its revenue came in at $2.68 billion, beating analysts’ projections by 5.1%. Furthermore, its adjusted EPS (earnings per share) of $0.35 exceeded analysts’ estimates by $0.06. On the back of its impressive second-quarter performance, the company’s management has provided an impressive third-quarter guidance, improving investors’ optimism and thereby driving the company’s stock price.
Since reporting its second-quarter performance, Shopify’s stock price has increased by 10.2%. Meanwhile, it trades at around a 10.5% discount compared to its 52-week high. Therefore, let’s assess its second-quarter performance and growth prospects to determine whether the stock is still a buy at these levels.
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Shopify’s second-quarter performance
During the second quarter, Shopify’s GMV (gross merchandise volume) grew 30.6% to $87.8 billion, driven by solid performances in North America and Europe. Same-store sales growth among existing customers, along with the addition of new customers, drove its GMV. Meanwhile, its top line grew 31.1% to $2.68 billion, amid growth of 37% in the merchant solutions segment and 17% in the subscription solutions segment. While GMV growth and greater adoption of its payment solutions lifted revenue from merchant solutions, subscription revenue benefited from higher-priced plans and increased variable platform fees.
Furthermore, its gross profits increased by 24.6%, which was lower than its top-line growth due to a contraction of 160 basis points in its gross margins. Lower non-cash revenues from high-margin partnerships, along with the ongoing impact of its PayPal partnership, weighed on the merchant solutions segment. Additionally, its continued investments in infrastructure to support volume growth and geographical expansion, as well as a shift to three-month paid trials, led to a decline in the gross profit margins of its subscription solutions.
Meanwhile, the company’s disciplined headcount management and operating leverage from topline growth helped reduce its operating expenses from 42% in the previous year’s quarter to 38%. Supported by revenue growth and lower operating expenses, the company generated $422 million in free cash flow, equal to 16% of its revenue. It was the eighth consecutive quarter of double-digit free cash flow margin. Now, let’s turn to its growth prospects.
Shopify’s growth prospects
The trade war has presented numerous challenges for small- and medium-sized enterprises (SMEs) worldwide. Meanwhile, Shopify, through its commerce solutions, is helping these SMEs to adapt and navigate this phase. Moreover, Shopify is investing in artificial intelligence to develop innovative new products that help attract a broader range of businesses and support its customers in growing their businesses. Meanwhile, the company has already introduced AI-powered products, such as Shopify Catalog, Universal Cart, Checkout Kit, and Sidekick, which could help expand its customer base and drive its GMV.
Additionally, the company has expanded its payment platform to 16 countries this year, nearly doubling its global reach. Furthermore, the company has enhanced its platform to support cross-border transactions, enabling merchants to accept multiple currencies and even crypto payments.
With the growing adoption of the omnichannel selling model, the demand for Shopify’s products could rise in the coming quarters. Given its growth initiatives, I anticipate the uptrend in the company’s financial performance to continue. Meanwhile, the company’s management expects its topline to grow in the mid- to high 20s in the third quarter, while free cash flow margin could come in the mid- to high teens. Therefore, the company’s growth prospects look healthy.
Investors’ takeaway
Shopify has navigated the tariff war effectively and is likely to sustain its strong performance in the coming quarters. The stock has outpaced the broader equity markets this year, gaining 26.2%. Reflecting this momentum, its next-12-month price-to-sales and price-to-earnings multiples have risen to 14.7 and 89.5, respectively. Given its robust growth prospects, investors are ready to pay a premium, thereby driving its valuation. Hence, investors with a long-term horizon of over three years may consider gradually accumulating the stock to capture superior returns.
