Expectations were high ahead of the Shopify Inc (US) (NYSE:SHOP) earnings report Tuesday morning. Somewhat quietly, Shopify stock had been one of the best performers in the entire market in 2017. SHOP stock had risen 115% year-to-date as of Monday’s close.
Those gains gave SHOP a seemingly nosebleed valuation. At $92, SHOP traded at 15x revenue, using the midpoint of 2017 guidance given after Q1 earnings. That multiple doesn’t quite rise to that given Snap Inc (NYSE:SNAP) in its initial post-IPO trading, but it was one of the highest in the entire market.
Between the YTD gains and valuation, investors would be forgiven for seeing Q2 earnings as potentially dangerous for SHOP stock. Instead, Shopify posted yet another “beat and raise” quarter, and Shopify stock is up another 10% in pre-market trading to top $100.
Blowout Earnings for SHOP Stock
The most important number in Shopify earnings is 75%. That’s how much revenue grew year-over-year. Sales of $151.7 million were more than $8 million ahead of consensus — with the 75% growth rate nine points better than the Street expected.
Adjusted operating loss narrowed modestly year-over-year, coming in at $2.9 million, and beating guidance of $6 million-$8 million. Adjusted net loss was 1 cent, five cents better than consensus.
Obviously, for a growth stock like SHOP, beating estimates is key to keeping the rally going. But even below the headline numbers, the quarter looks strong for Shopify. In tandem with the release, the company announced that its merchant base had exceeded 500,000 — and now reaches a stunning 175 countries. 131 million customers have purchased from Shopify stores over the past year — a number that rivals any online platform not run by Amazon.com, Inc. (NASDAQ:AMZN).
Subscription revenue rose 64%, as the number of merchants joining the service hit another record. Merchant Solutions sales (mostly transactions fees) climbed 86% on a 74% increase in GMV (gross merchandise volume). In other words, Shopify is adding more businesses. Those businesses are making greater sales, and Shopify is generating more revenue per sale — an impressive combination.
Q3 guidance looks strong as well, with revenue of $164 million-$166 million well ahead of estimates of $156.6 million. Relative to analyst projections, Shopify basically moved its growth story up a quarter. And that’s going to drive optimism toward Shopify stock in regular trading.
Is Shopify Stock Too Expensive?
Shopify earnings aside, the clear question is whether SHOP stock has priced in even a big beat. This now is a stock trading at a triple-digit multiple to 2019 earnings. And what should be a $10 billion-plus market cap for a money-losing stock might remind some investors of the tech bubble.
But it’s important to remember that the Shopify model, like most cloud plays, requires upfront losses in return for stable, multiyear, and high-margin recurring revenue. Shopify isn’t supposed to be profitable out of the gate — and SHOP stock holders understand that.
As long as those initial investments are working, investors can model in ever-increasing profits into the future.
With penetration rising so fast, the obvious question is whether Shopify will eventually reach a growth ceiling. How many of Shopify’s entrepreneurs and small businesses will eventually fail?
But I’d quote Bernstein analyst Ali Dibadj, who said of Procter & Gamble Co (NYSE:PG) two years ago, “I think it’s a unique time in the consumer industry’s history where you’re seeing a lot of ‘Davids’ beating ‘Goliaths’ every day.” Those Davids are using the Shopify platform as their slingshots. And they’re turning Shopify stock into a Goliath of its own.
As of this writing, Vince Martin has no positions in any securities mentioned.