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Morningstar | Shopify Posts Strong International Growth in 1Q; Raising FVE to $170

Across the pond and across the channel, Shopify’s multichannel e-commerce platform drove strong first-quarter earnings results, surpassing management’s expectations. The company benefited from robust international adoption coupled with lower marketing spending. As a result, Shopify significantly increased its guidance for the year, expecting more international growth to come. We think the outlook is fair given Shopify’s recent efforts to defend its narrow moat by continuing to build out its ecosystem and protect switching costs. Plus, we see why international adoption is high, given the company’s customized approach to local platform versions. However, we still believe Shopify’s payments revenue stream bears risks from competitors and their buildouts of in-app purchasing capabilities. All considered, we are raising our fair value estimate to $170 from $150 and adjusting our CAD fair value estimate to CAD 230 from CAD 198 based on a 1.35 foreign exchange rate. With the stock up 8% after earnings, Shopify is currently trading in 2-star territory.

Shopify reported first-quarter revenue of $320 million, an increase of 50% from last year’s $214 million—and up from management’s high-end guidance of $310 million. Subscriptions revenue grew significantly, up 40% year over year, driven by a monthly recurring revenue increase of 36%. Shopify Plus constituted more of the MRR mix, now making up 26% as opposed to 22% last year. Meanwhile, merchant adds, especially from international markets, grew meaningfully for core and Plus customers—with help from diverse pay options, as Shopify supports Google Pay, Apple Pay, and Shopify Pay. In addition, Shopify reported healthy merchant solutions revenue as gross merchandise volume increased to $11.9 billion, up 50% year over year, also driven by Plus and international growth.

Apart from international strength across offerings, first-quarter highlights included Shopify Capital’s growth in merchant cash advances and loans, while Shopify Shipping penetrated more of Shopify’s eligible customer base, reaching over 40% as opposed to 33% last year. Shopify continued to attract mature brands to its platform, adding big brands this quarter like Levi Strauss, Harper Collins, and Johnson & Johnson, some of which are just entering the direct-to-consumer market. We think Shopify’s track record with high-profile brands is helping turn around the company’s public perception as a “get rich quick” scheme and prove that the company’s offerings can speak for themselves.

Shopify posted GAAP operating losses better than expected for the quarter, at $36 million, as opposed to management’s former $47 million-$49 million range. However, this was a result of marketing campaign delays. While we think Shopify can still add significant value even as platforms like Instagram develop in-app checkouts, we think it will put pressure on overall revenue streams from payments. We also expect marketing costs for the company to remain hefty in the short term as management admitted to weaker brand awareness scores than desired.