Shopify Orders Up Strong Q4: Is $200 a Done Deal?

Shopify (NYSE:SHOP) stock’s strong fourth-quarter earnings don’t seem to be having a positive effect on Shopify stock. It was down more than 4% in midday Feb. 12 trading, though it closed up 1.4%.

Did we see a buy on rumor, sell on news situation? Absolutely.

There’s nothing I can see in its Q4 2018 results that merit a negative outlook. Let’s have a look at the quarter’s finer points.

Q4 2018 Results for SHOP Stock

First, the basics. Revenues in the fourth quarter were $343.9 million, 54% higher than a year earlier. On the bottom line, it made 26 cents a share on an adjusted basis, 73% higher than last year, and six cents clear of analyst estimates.

Now let’s dig a little deeper.

Any Shopify earnings report also must include Gross Merchandise Volume (GMV) and Monthly Recurring Revenue (MRR) data. GMV indicates how Shopify’s customers are doing in the quarter while MRR means the stickiness of Shopify’s business model. Both ought to be higher. Much higher.

GMV in the fourth quarter was $14 billion, 54% higher than a year earlier, while MRR was $40.9 million, 37% higher than in Q4 2017. For the entire fiscal year, GMV was $41.1 billion, 56% higher than a year earlier.  

SHOP generates revenue from two areas: Subscription Solutions and Merchant Solutions. Of the two, its subscription revenue is more profitable. So, while its merchant solutions saw revenues increase by 63% in the quarter to $210.3 million compared to 42% growth to $133.6 million for subscription revenue, Shopify stock’s subscription business had gross profits that were more than 20% higher in the quarter.

In an ideal world, Shopify’s subscription revenues, the more recurring of the revenue streams, would exceed its merchant solutions segment. Nonetheless, 42% and 63% growth is nothing to sneeze at. Nor is a 53% increase in gross profits.

Shopify Plus Growth Continues

Shopify Plus is the company’s service for larger businesses. While it charges $29 a month to smaller firms to use its e-commerce platform, it larger companies pay $2.000 or more per month for the privilege. As more large businesses sign on to Shopify Plus, it’s possible subscription revenues could pass merchant solutions despite the fact merchant solutions’ revenues increase as the company’s merchants do better.

In the fourth quarter, Shopify Plus contributed 25% of its $40.9 million in MRR, up from 21% a year earlier. More importantly, it grew the number of Shopify Plus merchants by around 50%. More subscribers multiplied by higher GMV equals higher revenue and profits.

Q4 2018 was a win for Shopify in the big business arena.

Another area of growth for the company is international sales. During the quarter it launched native language capabilities on its platform, which can now accommodate seven languages: English, German, Japanese, French, Spanish, Brazilian, Portuguese, and Italian.

Shopify’s building an e-commerce platform whose foundation goes both wide and deep — the type of revenue, geographic location,  type of customer — providing an ongoing pathway for growth.

The Bottom Line on Shopify Stock

At the beginning of this article, I stated there wasn’t anything in the company’s Q4 report that merits a negative outlook. Reuters begs to differ.

“Shopify Inc beat analysts’ estimates for quarterly profit on Tuesday, but a slowing rate of growth in total sales by vendors using the ecommerce company’s software sent its U.S.-listed shares down about 7 per cent before the bell,” Reuters stated Feb. 12. “Shopify said gross merchandising volume rose just 54 per cent compared with a 65 per cent jump in the same period a year earlier.”

If you’re questioning Shopify stock’s resilience. Don’t.

Growth rates tend to slow as revenues grow. It’s part of companies maturing. For example, a company that increases 65% from $100,000, finishes the year at $165,000. If it grows by 54% in the next year, it ends the second year with $254,100, 154% higher than where it started two years earlier.

I don’t know about you, but I’ll take 54% growth on a bigger pie over 65% of a smaller one, every day of the weak.

Shopify delivered an outstanding fourth quarter. Unless something unforeseen pops up between now and the end of the year, I don’t see how it doesn’t hit $200.  

As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

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