Last week Shopify (NYSE: SHOP) delivered another strong set of results, beating analyst estimates and raising guidance for the year. The stock, which had traded lower ahead of the release, initially rose as much as 10%. Since then the stock price has fallen sharply, along with the entire equity market.
This selloff is giving investors and traders another opportunity to buy the stock which should rally again, if, or when, equity markets stabilize. While Shopify does face risks in the longer term, it can be treated as a momentum play for at least the next quarter.
The Growth Story Remains on Track
In the 2nd quarter, Shopify generated positive earnings of $0.14 per share on a non-GAAP basis, $0.12 ahead of estimates. GAAP EPS were still negative at $-0.26, $0.07 ahead of estimates. Revenue for the quarter was $362 million, which was also well ahead of estimates and nearly 48% higher than a year ago.
Subscription revenue grew 38%, driven by monthly recurring revenue. Revenue from solutions including payment processing and transaction fees grew 56%, on the back of a 51% increase in gross merchandise volumes. Shopify Payments, the company’s native payments app saw its processes payments grow 61% to $5.8 billion.
The company’s gross margin came in at 56.6%, which was slightly higher than a year ago. However, higher expenses meant the operating and EBITDA margins deteriorated slightly.
Guidance for the full year’s revenue was raised to between $1.51 and $1.53 billion which is $30 million ahead of the previous range.
Yes, Shopify Is Expensive
Shopify is one of those stocks that trades on sentiment more than anything else. There is a strong bear case to made here – but it comes with a warning!
There is no doubt that Shopify is very expensive. For the stock’s price multiple, based on the current stock price, to fall below 100, revenue will have to continue growing at 50% and the profit margin will have to improve to 5%. Both may be difficult to achieve given the growth is already slowing, and competition is increasing.
Investors often cite Amazon as an example of what Shopify can become. However, that argument ignores the impact of AWS on Amazon’s valuation and the extent to which AWS is funding Amazon’s growth.
The Bull Case
The above arguments will matter at some point in the future, but until they do Shopify’s stock price will be driven by loyal and patient investors. Judging by coverage of last week’s earnings and the number of analysts upgrading their price targets, we are a long way from there being doubts about the stock. The first analyst upgrades put price targets of $385 and $400 on the stock.
Betting against a market leader with an army of supporters seldom works out. If the current market sell-off loses momentum, Shopify will be one of the first stocks that growth investors and momentum traders will pile into. However, given the risks the stock faces in the long term, tights stops would also be prudent.