Shopify (TSX: SHOP) offers essential internet infrastructure for commerce to businesses worldwide. The company was under pressure in the first few months of this year as investors were nervous that growth could normalize or slow down. However, supported by its healthy quarterly performances and optimistic third-quarter guidance, the company has rebounded over the last couple of months, with its stock price rising by more than 102% compared to its April lows.
With the recent surge in its stock price lifting its valuation, let’s review the company’s latest quarterly results and outlook to evaluate potential buying opportunities.
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Shopify’s second-quarter performance
Shopify reported an impressive second-quarter performance last month, with its gross merchandise value (GMV) growing by 30.6% to $87.8 billion. The solid performance in North America and Europe, amid the expansion of its customer base and increased sales among existing customers, drove its GMV growth. Further, the company posted revenue of $2.7 billion, representing year-over-year growth of 31.1%. A strong performance from both its merchant solutions and subscription solutions segments, which grew 37% and 17%, respectively, drove its top line.
Driven by strong topline growth, the company’s gross profit increased 24.6%. However, its gross margin contracted by 160 basis points to 48.6%. The decline was primarily due to lower contributions from higher-margin non-cash revenues from certain partnerships, increased investments in infrastructure to support volume growth and geographic expansion, and the reintroduction of its three-month paid trials.
Although operating expenses rose 25.7%, they fell as a percentage of revenue by 160 basis points to 37.7%. The disciplined headcount management and operating leverage from strong topline growth led to a decline in operating expenses as a percentage of revenue. Furthermore, the company generated $422 million in free cash flow, representing 16% of its total revenue and marking its eighth consecutive quarter of a double-digit free cash flow margin. Now, let’s look at its growth prospects.
Shopify’s growth prospects
The ongoing trade war has created several challenges for small and medium-scale enterprises (SMEs). However, Shopify, through its commerce solutions, is helping SMEs to overcome these challenges. Furthermore, the company is prioritizing the development and launch of new products to address the evolving needs of its customers. It is also geographically expanding its payment platform and offering new features to support cross-border transactions, thereby enabling merchants to accept multiple currencies.
Furthermore, Shopify is investing in artificial intelligence (AI) to develop innovative products that can attract a broader range of customers and help them expand their businesses. It is also utilizing AI to improve its operating efficiency, thereby driving its margins. Along with these growth initiatives, the growing adoption of the omnichannel selling model by SMEs has created long-term growth potential for the company.
Moreover, Shopify’s management has provided optimistic third-quarter guidance, with its topline projected to grow in the mid-to-high twenties. Further, the management also expects its free cash flow margin to come in the mid-to-high teens. Therefore, the company’s growth prospects look healthy.
Investors’ takeaway
The strong buying over the last few months has raised Shopify’s valuation to higher levels, with its next 12 months (NTM) price-to-sales and NTM price-to-earnings multiples at 15.2 and 92.8, respectively. However, given its robust business fundamentals, improving profitability, and higher growth prospects, I expect the uptrend in Shopify’s stock price to continue, thereby offering attractive buying opportunities.
