Investors are very confident about Shopify’s (NYSE:SHOP) prospects ahead of its earnings report scheduled for April 30, before the market opens. The stock already rose 43% in the last quarter following its 2018 Q4 report.
What was so good about that report and, more importantly, will Shopify stock repeat those strong results?
Shopify’s Fourth-Quarter Earnings
Shopify reported net income almost doubling from $14.7 million last year to $27.9 million this year. Revenue grew a respectable 54.3% to $343.9 million during this same period. These numbers affirm that the company is clearly still in a growth phase. The company forecast the upcoming first quarter’s revenue will come in the range of $305 million to $310 million.
Its operating loss will be $13 million to $15 million.
The legalization of cannabis in Canada drove revenues higher. Companies in almost every province and territory are using Shopify’s platform for delivering medicinal and recreational sales. In Ontario, the government chose Shopify to run its online cannabis sales. And as more money pours into the cannabis sector, Shopify customers have plenty of money and liquidity to grow its business. The long-term prospects of this positive cycle in money flow will support Shopify’s extraordinary revenue growth.
Excellent Uptime and Performance
Shopify can account for strong customer signups and stickiness from its back-end performance. On its Q4 conference call, the company explained how it won business from the Canadian cannabis industry:
“We also entered a new retail vertical, the Canadian cannabis industry. Some of the country’s largest provinces and the largest licensed producers that flock at Shopify experienced excellent uptime and performance on launch day and beyond which demonstrates the fitness of our platform for regulated industries around the world.”
Source: Seeking Alpha Transcript
Looking ahead, Shopify believes that it will win more business from cannabis firms as sales increase internationally. Plus, as cannabis legalization continues globally, international firms may look to the Shopify platform to build its online presence.
Shopify has a strong, healthy and growing total addressable market that does not depend only on adding merchants. Even though management is confident that it will continue to add merchants for the foreseeable future, GMV growth matters more.
The company increased sales and marketing spend by around 50% over last year’s levels to invest in the long-term. For example, it invested in product marketing but will not get to report its benefits in the upcoming report. Still, the company is monitoring product adoption and take rates to ensure that its investments are on the right path. So long as merchants are successful, their GMV will improve and Shopify will have a chance to monetize that GMV over time.
Growth Opportunity From Priority Areas
Shopify’s investments in three priority areas — Platform, Shopify Plus and International — is helping its merchants succeed. With Platform, merchants have a page to go to first to help them work more efficiently. Services Marketplace give merchants better back-office support. And through the use of data algorithms to increase automation, merchants can more easily fulfill orders.
In Q4, sales surged from Cyber Monday and Black Friday events. In the upcoming quarter, Shopify will not have that seasonal lift, so investors should not expect the company to exceed its estimates.
Valuation of Shopify Stock
Shopify stock is at odds with Wall Street analysts. Twenty-one analysts covering SHOP stock have a $196 price target, which suggests the stock is overvalued by 12.3% (per tipranks). If investors value Shopify based on its future cash flows, discounted back to present value, the company must grow revenue.
At a minimum, revenue must grow by at least 18% over the next 10 years. This finbox.io model shows how much revenue it needs to justify the current stock price.
Takeaway on SHOP
Shopify stock is, by no means, inexpensive. Markets are very confident that management will beat consensus estimates. But if it misses in the upcoming Q1 report, the stock could fall.
If that happens, investors may want to start a position in the company.
Disclosure: As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.