“You Never Get Fired for Buying Shopify”

Its first quarter results are in the books and ATB Capital Markets analyst Martin Toner has become bullish on Shopify (Shopify Stock Quote, Chart, News, Analysts, Financials TSX:SHOP)

On May 8, SHOP reported its Q1, 2024 results. The company posted Adjusted Operating Income of $201-million on revenue of $1.86-billion, a topline that was up 23% year-over-year.

“You’re seeing the strongest version of Shopify in our history. Our outstanding Q1 performance is clear proof of our dedication to the new shape of Shopify, our commitment to operating with a consistent team size, and our focus on building for the long-term to deliver both growth and profitability,” said president Harley Finkelstein. “We are building a 100-year company, and we will continue to remain fiercely agile, capitalizing on every opportunity that accelerates the success of our merchants, enables us to continue to build world-class products, and enhances operational efficiency for better returns.”

In a research report entitled ““You Never Get Fired for Buying Shopify”, Toner assessed the quarter.

“Before market open on May 8, SHOP reported Q1/24 consolidated revenue of $1,861mm (+23% y/y), slightly beating consensus of $1,829mm and representing a ~100bp sequential deceleration. SHOP merchants generated $60.9bn (+23% y/y) in gross merchandise volume (GMV), beating consensus of $59.3bn,” he wrote. “Merchant solutions grew 20% to $1,350mm, slightly beating consensus of $1,334mm. Gross margin of 51.4% represented a 390bp y/y improvement, helped by the divestiture of its logistics business, and slightly beat consensus by 20bp. Adjusted operating income of $201mm beat consensus of $189mm, and adjusted EPS of $0.20 beat consensus of $0.17. Management provided Q2 revenue growth guidance at a high-teens percentage rate on a y/y basis, slightly below consensus expectations of 19% growth. Gross margin for Q2 is expected to decrease by 50bp q/q, and operating expenses will increase at a low-to-mid-single digit percentage rate relative to Q1. Q2 free cash flow (FCF) margin is expected to be similar to Q1’s 12% result, which will mark four consecutive quarters of double-digit FCF margin. Today’s results caused concern that revenue growth was slowing, in part driven by macro-related factors in Europe. We believe Investors are also concerned about operating expense growth and gross margin compression as Shopify wins larger enterprise customers with more leverage in negotiations. We believe larger enterprises that require fewer operating expense dollars will be accretive to operating income margins and free cash flow margins and Shopify will continue to show operating leverage and peer-leading profit growth.”

In the report, Toner upgraded SHOP from “Sector Perform” to “Outperform” and raised his price target on the stock from $110.00 to $115.00, implying a return of 33.5% at the time of publication.

The analyst thinks SHOP will post Adjusted Operating Income of $1.13-billion on revenue of $8.54-billion in fiscal 2024. He expects those numbers will improve to Adjusted Operating Income of $1.83-billion on revenue of $10.4-billion in fiscal 2025.

“Shopify is confident in its ability to successfully penetrate the Enterprise,” Toner added. “Any company who has a consumer facing business is in-play. The Company is winning an impressive variety of new customers, including some large brands with high expectations like Coach. Coach is a good example of the scale of this growth opportunity. It is part of Tapestry Inc. (TAP-N, NR), which also owns Kate Spade and Stuart Weitzman. Enterprises are most likely to select small parts of its business as the first place for Shopify adoption, in order to lessen risk. Shopify believes that it can expand with enterprise customers as it delivers a superior experience to legacy competitors, who carry significant technical debt. “You never get fired from buying IBM” has long been a popular saying among IT professionals, as Shopify delivers improvements in performance to its enterprise customers, Shopify believes, “you never get fired for buying Shopify” will become common among consumer facing businesses and e-commerce departments at large enterprises.”