Shopify Inc (SHOP) NPV

Shopify’s underlying revenue increased 29% to $1.9bn in the first quarter, in line with internal guidance. Both Merchant and Subscription Solutions contributed to growth, rising by 20% and 34%, respectively.

Gross Merchandise Volume, representing all orders on platform rose 23% to $60.9bn, surpassing market expectations. Of this amount, 60% was handled by Shopify, a 4 percentage points increase on last year.

Underlying operating profit improved from a loss of $31mn to $201mn, ahead of market expectations.

Free cash flow increased from $86mn to $232mn. Net cash rose by $169mn since year-end, to $4.3bn.

Underlying revenue guidance for the second quarter indicates a low-to-mid-twenties percentage rate increase. The group expects margins to get squeezed and costs to rise compared the quarter just reported, implying an operating profit of around $114mn, 20% below what the market had previously anticipated.

The shares fell 18.2% in pre-market trading.

Our view

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 the macroeconomic outlook is brighter than it has been, further pressure from inflation or declining consumer spending could increase sellers leaving the platform and put a strain on revenue growth.

The group’s been keeping a tight grip on costs as revenue has risen in the first quarter. Coupled with shedding the financial burden of its unsuccessful logistics company last year, this should support margin growth in the long term.

Overall, we’re impressed by Shopify’s leading proposition and ability to integrate itself into merchant’s operations, but the road to long-term growth won’t be easy. Disappointing second-quarter guidance looks to be reflected in the group’s valuation but investors should be prepared for further ups and downs.

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