Shopify Earnings: Impressive Multiprong Margin Surge Drives Strong Results

Third-quarter revenue beat our above-consensus expectations.

Dan Romanoff, CPA 2 November, 2023 | 1:51PM
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Narrow-moat Shopify SHOP reported excellent third-quarter results, including better-than-expected revenue and meaningfully better profitability. Guidance was a little better than we anticipated on the profitability front but a little shy of our revenue assumption. That said, we were anticipating a dramatic increase in profitability in the near term as a result of headcount reductions, price increases on the standard version, and the disposition of the margin-dilutive logistics business. Therefore, our profitability estimates have increased only slightly. We are increasing our fair value estimate to $83 per share from $76. After the roughly 20% spike in Nov. 2 trading, we see the stock as once again fairly valued.

Third-quarter revenue grew 25% year over year as reported to $1.714 billion, ahead of our above-consensus expectations. Normalizing for the sale of the logistics business, revenue expanded 30% year over year. Relative to the prior-year period, subscription revenue grew 29% year over year, while merchant solutions increased 24%. Merchant solutions was in line with our estimates while subscriptions drove upside. Overall revenue strength was driven by a combination of good merchant growth and performance, the impact from price increases, and adoption of merchant solutions products like payments, capital, markets, and installments. Offline and Europe also continued to perform very well.

We were impressed by the strong margins and expect the firm to use these expense levels as a new baseline, which was already largely contemplated in our model. In the third quarter, non-GAAP operating margin was 15.8%, compared with negative 4.7% a year ago. We see margin strength in the quarter as a result of better revenue, recent headcount reductions, the impact of price increases on the standard Shopify version, the disposition of the logistics business, and measured spending on more discretionary items. Free cash flow was similarly impressive.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Shopify Inc Registered Shs -A- Subord Vtg77.87 CAD-1.67Rating

About Author

Dan Romanoff, CPA  Dan Romanoff, CPA, is an equity research analyst on the technology, media, and telecommunications team for Morningstar.

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