Shopify reported a 21% rise in second-quarter revenue to $2.0bn, or 25% after adjusting for the sale of its logistics business. Growth was broad, driven by a 22% increase in orders processed through the platform, higher prices on subscription plans, and more merchants signing up for Shopify’s products.
Operating profit improved from a loss of $1.6bn last year, to a gain of $241mn. The prior year was impacted by a $1.3bn impairment of the now sold logistics business.
Free cash flow rose from $97mn to $333mn. Net cash was flat from the start of the year, ending the period at $3.9bn.
Third quarter guidance includes revenue growth of around 22.5% at the midpoint of the guided range, gross margins up 0.5 percentage points from the quarter just ended, and operating costs at 41-42% of revenue. These metrics were all in-line or better than markets had expected.
The shares rose 17.8% in pre-market trading.
Our view
After a disappointing start to the year, second quarter performance was back on track, and guidance was even better.
Shopify is a commerce powerhouse. But rather than selling products itself, it provides the internet infrastructure for businesses to operate online. Its critical role means it’s involved in powering 10% of online shopping in the US alone.
Its platform simplifies the complex world of online retail, offering a range of tools for businesses of all sizes to create and manage their online shops. This covers website templates to payment processes, and everything in between.
Perhaps unsurprisingly, the shift towards digital shopping has been a major growth driver for Shopify. The group’s valuation has come down some way since the immediate aftermath of the pandemic, when we were all living exclusively through digital means, but remains relatively elevated. That reflects excitement from the market, while also increasing the risks of ups and downs.
We share some of this enthusiasm, particularly for the group’s subscription-based revenue, which it collects from sellers to use its platform. While these make up a smaller portion of overall revenue, it’s still a more resilient and profitable source of income than the slice it collects on each sale.
Investments are being made to expand the range of solutions clients can subscribe to. But for now, the merchant solutions segment, including transaction fees, still contributes over 72% of revenues, tying Shopify’s success closely to that of its customers.
While Shopify boasts large clients like Gymshark and Netflix, its typical customers are small and medium-sized businesses that tend to be more susceptible to the health of the broader economy. While there’s been chatter of weakening conditions, and recession odds in the US have ticked higher, Shopify hasn’t seen any real impact from its customers yet.
The group’s been keeping a tight grip on costs and making sure the headcount remains stable is a real focus. Coupled with shedding the financial burden of its unsuccessful logistics company last year, this should support margin growth.
Overall, we’re impressed by Shopify’s leading proposition and ability to integrate itself into merchant’s operations. There are several growth levers to pull on, led by the growing value of orders through the platform and the adoption of its services from larger players. But the valuation, post second-quarter bump, will already have a lot of those strengths built in.
Environment, social and governance risk
The technology sector is generally medium/low risk in terms of ESG, though some segments are more exposed, like Electronic Components (environmental risks) and data monetisers (social risks). Business ethics tend to be a material risk within the tech sector, ranging from anti-competitive practices to intellectual property rights. Other key risks include labour relations, data privacy, product governance and resource use.
According to Sustainalytics, Shopify’s management of material ESG issues is average.
ESG reporting is in place and the board is responsible for overseeing ESG issues, but reporting does not align with leading best practices. Data privacy is an important risk, and it’s being managed well but with room for improvement. There haven’t been any major controversies from a data or cybersecurity standpoint, but it could do with improving regular risk assessments.
Shopify key facts
All ratios are sourced from Refinitiv, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
This article is not advice or a recommendation to buy, sell or hold any investment.No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.Non - independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place(including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing.Please see our full non - independent research disclosure for more information.