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Why Is Shopify (SHOP) Up 12.9% Since Last Earnings Report?

Zacks Equity Research

It has been about a month since the last earnings report for Shopify (SHOP). Shares have added about 12.9% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Shopify due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Shopify Q2 Earnings & Revenues Top Estimates, Ups '19 View

Shopify Inc. delivered second-quarter 2019 adjusted earnings of 14 cents per share, surpassing the Zacks Consensus Estimate of 3 cents. Moreover, the figure improved from 2 cents reported in the year-ago quarter.

Total revenues surged 48% from the year-ago quarter to $362 million, outpacing the Zacks Consensus Estimate of $350 million. The figure also fared better than management’s guided range of $345-$350 million.

The top line benefited from an improving merchant base and rapid expansion in international markets. The company continues to launch a number of merchant-friendly applications to meet the requirements of a dynamic retail environment, in turn bolstering merchant base.

Quarter in Detail

Subscription Solutions revenues (42.3% of total revenues) surged 38% to $153 million driven by persistent growth in Monthly Recurring Revenue (MRR) due to the addition of several new merchants.

As of Jun 30, 2019, MRR was $47.1 million, up 34% from the year-ago quarter figure of $35.3 million. Shopify Plus accounted for $12.4 million, representing 26% of MRR compared with 23% in the quarter ended Jun 30, 2018.

Merchant Solutions revenues (57.7%) advanced 56% to $208.9 million, primarily on account of growth in GMV, which improved 51% from the year-ago quarter to $13.8 billion.

Robust performance of Shopify Payments, Shopify Shipping and Shopify Capital also aided growth.

Shopify Capital advanced $93 million cash to merchants in the reported quarter, surging 36% compared with $68.5 million in the year-ago quarter. Notably, since the launch of Shopify Capital, cumulative merchant cash advances have improved to almost $638 million, out of which $115.6 million was outstanding as of Jun 30, 2019.

Shopify Shipping witnessed robust adoption in the second quarter. The offering is being leveraged by approximately 42% of total eligible merchants across the United States and Canada.

Gross Payments Volume (GPV) came in at $5.8 billion, accounting for 42% of GMV processed in the second quarter, up from $3.6 billion (40%) in the prior-year quarter.

Purchases from merchants’ stores especially from mobile devices witnessed 80% of traffic and garnered 70% of orders for the quarter ended Jun 30, 2019, up from 76% and 66%, reported in the year-ago quarter, respectively.

Operating Details

Non-GAAP gross profit surged 49.6% year over year to $205.8 million. This can be attributed to “new payment partner pricing terms” and robust performance of Shopify Shipping and Shopify Capital.

Non-GAAP gross margin expanded 100 bps from the year-ago quarter to 57%.

Non-GAAP operating expenses surged 41.7% year over year to $200.9 million. Non-GAAP operating expenses as a percentage of revenues contracted 200 bps to 56%.

Shopify reported adjusted operating income of $4.8 million against the year-ago quarter’s loss of $4.3 million.

Balance Sheet & Cash Flow

Shopify ended the reported quarter with cash, cash equivalents and marketable securities balance of $2.013 billion compared with $1.997 billion recorded at the end of previous quarter.

The company generated cash from operations of $47.4 million during the six months ended Jun 30, 2019.

Latest Developments to Aid Financial Performance

In a bid to make the platform more merchant friendly, Shopify is working on extending language capabilities beyond English. The focus on local languages is helping in bolstering international presence. We believe this inclusive move will boost engagement and consequently increase adoption going forward.

Recently, the company announced availability of local language capabilities in Hindi, Danish, Dutch, Simplified Chinese, Traditional Chinese, Finnish, Norwegian, Korean, Thai, Swedish, and Malay, taking total languages accessible to 18.

Notably, Shopify platform already includes English, Brazilian, Portuguese, Japanese, German, Spanish, French, and Italian language capabilities.

Moreover, in the second quarter, the company introduced Shopify Payments in the Netherlands, which bodes well for revenue growth.

Shopify also made a slew of announcements at its annual partner conference, Shopify Unite, with the focus being on enhancing business processes for its merchants.

The company rolled out Shopify Fulfillment Network in the United States, for the first time, to facilitate commerce. The eligible merchants can avail benefits of the network by signing up for early access.

The company also rolled out the “all-new Shopify Plus” to aid enterprise merchants with business expansion.

Moreover, the company unveiled new Shopify POS — point of sale software — to enable retailers in expanding brick-and-mortar business. The latest POS is scheduled to be “available later this year” and will provide access to the company’s POS app extensions. It is loaded with innovative customer service shortcuts and easy-to-use interface features to bolster business.

In a bid to make the platform more merchant friendly, Shopify rolled out new payment and shipping capabilities. Moreover, the company rolled out new store design experience to boost online shopping. Merchants can display their products in 3D and video models by leveraging the new design.

During the reported quarter, Shopify also unveiled the integration of Shopify Ping with Apple Business Chat. The move allows merchants to talk and establish a personal connection with customers.

Momentum witnessed by Shopify Payments, Shopify Ping, Shopify Capital and Shopify Shipping are key positives. Moreover, increasing initiatives to strengthen presence in the international market remain a key catalyst.

Moreover, management remains positive about the company’s expanding partner ecosystem that aids it to identify and reach merchants who are otherwise inaccessible. The total number of apps registered in the App store amounts to more than 2,900, out of which 200 apps were added in the second quarter.

Guidance

For third-quarter 2019, Shopify projects revenues in the range of $377-$382 million, whose mid-point of $379.5 million.

In the third quarter, the company expects adjusted operating income to be in the range of $0 to $3 million.

For full-year 2019, Shopify raised outlook. Management now projects revenues in the range of $1.51-$1.53 billion better than the previously guided range of $1.48-$1.50 billion.

Management continues to expect adjusted operating income for fiscal 2019 to be in the range of $20-$30 million.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -11.56% due to these changes.

VGM Scores

At this time, Shopify has an average Growth Score of C, a grade with the same score on the momentum front. However, the stock was allocated a grade of F on the value side, putting it in the lowest quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending downward for the stock, and the magnitude of these revisions has been net zero. Notably, Shopify has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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