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Shopify has more upside still, says ATB


Investors should be seeing a lot of positives in the latest earnings report from Canadian e-commerce giant Shopify (Shopify Stock Quote, Charts, News, Analysts, Financials TSX:SHOP), according to ATB Capital Markets analyst Martin Toner, who reviewed the results in a Thursday note to clients. 

With shares rising a huge 23 per cent in trading on Thursday, the market clearly liked SHOP’s news, which along with the Q1 2023 financials included another announced restructuring round and the selling of its logistics business to private company Flexport. 

“The changes we’re announcing today will ensure we keep pace with the high velocity of change before us, delivering the cutting-edge solutions our customers have come to expect from Shopify,” said President Harley Finkelstein in a press release.

Shopify CEO Tobi Lutke said in an open letter to employees that the company will be downsizing its employee roster by 20 per cent, news which comes after last July’s announcement of a ten per cent reduction in workforce.

“For the past year we’ve been subtracting everything that’s in the way of making the best possible product,” said Lutke in the letter. “This is a consequential and hard week. It’s the right thing for Shopify but it negatively affects many team members who we admire and love working with.”

On the Flexport deal, the press release said Shopify has for years been building a world-class logistics solution and that Flexport will now take over the project, with Shopify to get a 13 per cent equity stake in Flexport as a result.

Commenting on the move, Toner wrote, “Pivots in strategy for companies at Shopify’s stage are common. The rationale for a partnering strategy and plans for product development efforts in other high potential areas will be important, in our opinion. The Company’s strong [first quarter] results confirm that it remains a share gainer and winner in a large and growing market with a strong business model.”

SHOP’s Q1 featured revenue up 25.3 per cent year-over-year to $1,508.0 million, which was above the consensus estimate of $1,434.5 million and also a beat of Toner’s call at $1,412.8 million. (All figures in US dollars except where noted otherwise.)

Gross profit was up 12.4 per cent to $717.0 million, also beating the Street’s forecast at $689.1 million and Toner’s estimate at $693.1 million. Adjusted EPS at $0.01 per share was also better than the consensus at negative $0.04 per share and ATB at negative $0.01 per share.

With the update, Toner reiterated an “Outperform” rating on Shopify and target of C$82.00, which at the time of his report’s publication represented a projected one-year return of 30 per cent.

“We expect Shopify to continue to add merchants and improve the take rate of Shopify’s revenue as a percentage of merchant’s GMV. Long term, as the Company continues to add revenue at high gross margins on a fixed cost base, we believe it will become highly profitable,” Toner wrote.

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