Morningstar | Shopify’s Fourth Quarter in the Bag but Margin Pressure in Forecast; Maintain $150 FVE. See Updated Analyst Note from 12 Feb 2019
Shopify had the fourth quarter in the bag, but a spending spree in the 2019 outlook mitigates our profitability expectations for the firm in the near term. At checkout, Shopify reported fourth-quarter revenue surpassing our projections by a decent amount, while operating losses were not as bad as we expected for the growing software company. However, in 2019, Shopify will spend a significant amount on brand awareness and R&D to capture more international merchants. We now expect narrow-moat Shopify to become profitable in 2022, one year later than our previous estimate. Still, we think Shopify’s investment will pay off as this quarter’s stellar operating metrics suggest. We are therefore maintaining our $150 fair value estimate and adjusting our CAD fair value estimate to CAD 198 from CAD 200 based on a 1.32 foreign exchange rate. This places the stock in 3-star territory with very high uncertainty.In the fourth quarter, key metrics were elevated all around, pushing revenue past expectations. Fourth-quarter revenue increased 54% year over year to $343.9 million, bringing the year to a total of $1.1 billion in revenue (a 59% increase when compared with the prior year). Monthly recurring revenue increased by 37% to $40.9 million, largely due to Shopify Plus taking more share of MRR. Shopify Plus and international merchants’ increasing share of revenue helped drive gross merchandise volume of $14.0 billion, up 54% compared with GMV in the prior year.
Turning to 2019 guidance, Shopify expects to earn a GAAP operating loss in the range of $140 million-$150 million, due to higher brand and R&D spend as Shopify continues to invest in international functionality, like translation, as well as other capabilities to be announced.
Altogether, we think Shopify is making the right moves to grow total merchants and maintain switching costs, justifying the significant bump in R&D and brand spend, in our view. While augmented reality browsing has a ways to go before being part of the mainstream shopping experience, we’re encouraged that Shopify appears to be at the forefront of online retail tech like AR browsing. Shopify launched the feature in more than 600,000 stores and other online retailers have seen results. According to NexTech, Houzz saw sales conversions increase by 11 times after adopting AR browsing--so we’re eager to see how Shopify’s conversion rates alter in the long term as the company maintains the appeal of its multichannel platform.
Shopify provides a cloud-based commerce platform designed for small and medium-sized businesses. Merchants use its software to run their business across all of their sales channels, including web, tablet and mobile storefronts, social media storefronts, and brick-and-mortar and pop-up shops. Co. provides a platform for merchants to create an omni-channel experience that helps showcase the merchant's brand and grow its business. Co.'s platform provides merchants with a single view of their business and customers across all of their sales channels and enables them to manage products and inventory, process orders and payments, build customer relationships and leverage analytics and reporting.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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