Shopify is a Buy after Q2 earnings, says National Bank

Take a breath and keep going, that’s the advice from National Bank Financial analyst Richard Tse when it comes to Canadian e-commerce giant Shopify (Shopify Stock Quote, Charts, News, Analysts, Financials NYSE:SHOP). Tse maintained an “Outperform” rating on the stock in a Wednesday report along with a $75.00 per share target price, which at the time of publication represented a projected one-year return of 122.2 per cent.

Shopify released second quarter 2022 financials on Wednesday, featuring revenue up 16 per cent year-over-year to $1.295 billion and a net loss of $1.2 billion or $0.95 per basic share compared to net income of $0.9 billion or $0.69 per share a year earlier. Shopify said the Q2 net loss included a $1.0 billion net unrealized loss on equity and other investments, while the Q2 2021 included a $0.8 billion net unrealized gain also from equity and other investments. (All figures in US dollars.)

“While commerce through offline channels grew faster in Q2, where our exposure is lower but growing, we continued to see increased adoption of our solutions, enabling our merchants to remain agile against a challenging macro environment and highlighting the breadth and resilience of our business model,” said Amy Shapero, Shopify CFO, in a press release. “Our merchants’ GMV growth continued to outpace the growth of the broader U.S. online and offline retail markets as consumers shopped across more surfaces.”

Monthly Recurring Revenue was up 13 per cent year-over-year to $107.2 million, with enterprise-focused Shopify Plus representing 31 per cent of that figure compared to 26 per cent a year ago. Gross Merchandise Volume was up 11 per cent to $46.9 billion.

SHOP has been under pressure lately due to a number of factors including a general market rotation away from tech and high-growth names and a slowdown in e-commerce growth amid the return of bricks and mortar stores. The stock is down 74 per cent year-to-date and down 77 per cent over the past 12 months. 

Looking at the Q2 numbers, Tse said they were below consensus expectations and exemplified tough year-over-year comparisons with the outsized growth of 2020 and 2021. That said, Tse thinks the results were reasonable in the context of the current e-commerce environment. 

“The reality is that Shopify grew revenue by 16 per cent Y/Y (17.5 per cent CC) in the face of challenging COVID comps which had a comparable prior year growth rate of 57 per cent. In addition, many of the notable KPIs continued to move higher with take rate ticking up to 1.98 per cent (+12 bps Y/Y), Shopify Plus MRR moved up to represent 31 per cent of MRR (+500 bps Y/Y) and International merchants as a percentage of total merchants ticked up Y/Y and Q/Q. All that is consistent with our investment thesis,” Tse wrote.

Tse said upcoming quarters will likely be challenging for Shopify, particularly on opex as the company continues to retool its operations. The analyst added there’s also a degree of uncertainty related to SHOP’s push to scale its Fulfillment Network. But in the end, Tse said the company’s initiatives will result in an accelerating growth rate for the company through 2023, one which will re-rate the stock higher.

“In our view, Shopify remains a leading disruptor and we believe upside in the stock will come from organic growth via incremental drivers like International, new Merchant Services like SFN, Shopify Plus, Shop, Shop Pay, expanding channel partnerships (like Facebook and Google) and now POS Pro for brick-and-mortar retail. With cash & equivalents balance of $7.0 billion ($5.3 billion following the acquisition of Delivrr), we believe Shopify has more than enough capacity to fund its growth initiatives,” he said.

Shopify’s Q2 revenue of $1.295 billion was above Tse’s estimate at $1.261 billion but below the consensus call of $1.331 billion, which the adjusted EPS loss of $0.03 per share was equal to Tse’s estimate but below the Street’s call for positive EPS of $0.02 per share.

Tse commented on Shopify’s take rate, the commissions charged to third-party sellers and service providers, which came in at 1.980 per cent compared to Tse’s estimate at 2.074 per cent. Tse said the increasing take rate (up 12 basis points year-over-year) is a good sign that SHOP is still in the early innings and is still scaling.

“In our view, the rising take rate suggests Shopify continues to make progress in penetrating its merchant base with new services. And it’s our view those services are still not at full scale with one of the most mature, payments, having an attach rate of 53 per cent (we’d note mature market attach rates are as high as 90 per cent). And with payments still accounting for a significant portion (~72 per cent) of Merchant Services, we see a lot of opportunity for the Company’s take rate to increase,” he said.

“On that note, Management commented that Merchant Solutions revenue will continue to grow as a percentage of GMV. Our view continues to be that take rate is an important KPI, particularly as Shopify expands its merchant services offering,” Tse wrote.