Shopify (NYSE:SHOP) reported what ostensibly were mixed third-quarter numbers, knocking Shopify stock off a couple of percentage points.
Revenues topped expectations. Next quarter’s revenue guide came in ahead of expectations, too, and the full-year revenue guide was lifted. But, third-quarter profits missed expectations, and the fourth quarter profit guide was unimpressive.
Upon closer inspection, though, Shopify’s third-quarter earnings report was actually very good. The third-quarter profit miss was the result of a one-time tax provision. Ex that provision, profits would’ve topped expectations.
Further, the weak fourth-quarter profit guide is the result of heavy near-term investment into strategic growth opportunities. Shopify has done this before many times, and it always pays off in the long run.
Big picture, then, Shopify’s third-quarter earnings confirm that Shopify stock is a long term winner. Sure, the stock will run into some valuation friction up here. But, the growth tailwinds underpinning Shopify are strong enough that, in the long run, SHOP stock will fully grow into its rich valuation and then some.
Ultimately, this stock has an opportunity to head towards $1,000 over the next decade, meaning long term investors would be wise to embrace and take advantage of near term noise.
Shopify’s Earnings Were Strong
Although the headline numbers were mixed, Shopify’s third-quarter earnings report was actually very good.
The revenue picture at Shopify remains robust and healthy. Revenues didn’t just top expectations in the quarter – they also rose 45% year-over-year. That is a very minor slowdown from last quarter’s 48% growth rate and the first quarter’s 50% growth rate.
Further, next quarter’s guide calls for revenues to rise roughly 40%. Thus, the numbers show that Shopify is sustaining big and healthy revenue growth – despite tough laps – and that’s a sign of secular strength in the company’s growth narrative.
Despite the continued top-line strength, the earnings report was mixed on the profits front. Specifically, the company missed profit expectations in the quarter by a mile, and adjusted net profits in the year-ago quarter, swung to a net loss this quarter. Also, next quarter’s guide calls for operating margins to compress year-over-year.
The Q3 profit miss was entirely due to a one-time tax provision, which amounted to roughly $0.43 per share. Ex that provision, adjusted profits would’ve been $0.14 per share, both above expectations and up substantially from a year ago. Further, the margin compression next quarter is a byproduct of heavy investment in strategic growth opportunities.
Shopify has done this before (most recently in 3Q18), and it always results in one-quarter of margin compression, followed by sustained big revenue growth and a margin rebound the next quarter.
Thus, big picture, Shopify’s third-quarter earnings report was actually very good.
Growth Tailwinds Are Robust
Shopify’s strong third-quarter print underscores that the growth tailwinds supporting SHOP stock remain robust.
Shopify is all about empowering the little guy. Specifically, they provide a suite of tools that enable merchants and retailers of all shapes and sizes to build formidable eCommerce businesses. There are two big secular tailwinds supporting this business model.
First, you have a secular rise in do-it-yourself mentalities, wherein Millennials and Generation Z-ers are all about becoming entrepreneurs. The more entrepreneurs there are, the more small retailers and merchants there are.
Small retailers and merchants need Shopify’s tools to survive in the crowded e-commerce landscape. Consequently, a secular rise in do-it-yourself mentalities directly leads to more Shopify customers.
Second, you have a secular rise in direct commerce, wherein consumers are rapidly pivoting from buying things in-store to buying things online. In this world, a website is the new storefront, and everyone retailer/merchant needs a website. Shopify build those websites better than anyone else. Consequently, a secular rise in direct commerce means more Shopify websites, and more sales through those websites.
Because of these two secular growth tailwinds, Shopify has a robust growth trajectory ahead of it, and projects as a big revenue and profit grower for a lot longer.
Shopify Stock Could Head Towards $1,000
Given its robust growth trajectory, Shopify stock has an opportunity to head towards $1,000 over the next decade.
Here are the numbers. In 2018, Shopify controlled just 1.4% of the global eCommerce market, up from 0.8% in 2016 and 1.1% 2017. This year, Shopify’s e-commerce share should rise to about 1.7%. Thus, over the past few years, Shopify has consistently grown its e-commerce market share at a cadence of roughly 30 basis points per year.
Given the entrepreneur economy and direct commerce tailwinds, this cadence of share expansion should persist for the foreseeable future, meaning Shopify has an opportunity grab a 5% eCommerce market share by 2030.
Assuming the e-commerce market continues to grow at a healthy double-digit pace over the next decade, then Shopify should be supported by fairly consistent 20%-plus revenue growth over the next decade, too. This creates a runway for Shopify to hit $10 to $15 billion in revenues by 2030.
Gross margins presently sit around 56%. They should head towards 60%, in the long run, thanks to sub solutions price hikes from increased demand. The opex rate presently hovers around 55%. It should drop towards 30% in the long run as scale drives positive operating leverage.
Net net, Shopify has an opportunity to be a $10 to $15 billion revenue company by 2030, with 30% operating margins. My modeling suggests that this combination could produce around $25 in earnings per share by 2030. Based on an application software sector-average 35-times forward earnings multiple, that equates to a 10-year-forward price-target for SHOP stock of $875.
Bottom Line on SHOP Stock
Shopify stock is a long term winner that’s on a path towards a near $1,000 price tag over the next decade. As such, the best strategy with SHOP stock is to buy-and-hold for the long run.
As of this writing, Luke Lango was long SHOP.