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Here’s Why Shopify Stock Should Have Another Great Quarter

Chris Lau

The unique offering of Shopify (NYSE: SHOP) for business owners keeps competitors out of the space. So markets may expect another round of strong quarterly earnings.

Last quarter, the company reported profits and revenue that beat consensus last quarter. This time, the only unpredictable near-term risk is whether or not the stock’s valuation will bring selling pressure.

In light of markets getting skittish, a correction in the share price may create an entry point.

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Strong Momentum and Shopify Stock

Shopify added shipping features that help merchants sell more and work more effectively. Its users are getting benefits from the partner ecosystem. And the launch of its new App Store last September is leading to meaningful conversation rate increases for app installations after the user performs a search.

Shopify’s profit margin keeps growing because the features it develops also adds value at the transaction levels. As revenue from merchants grows, so does GMV.

This is a win-win for both Shopify stock and its customers.  On its conference call, management mentioned Fraud Protect as an example of a feature that adds value for the merchant by preventing fraudulent charge-backs. In return, Shopify earns a small fee for the service.

Shopify Plus and Shopify Stock

Ahead of the busy holiday season, hundreds of fast-growing merchants joined Shopify Plus. The offering primarily targets big retailers. For instance, The Brick and Leon’s Furniture is a large-sized firm in Canada that is signed up for Shopify Plus.

Unilever (NYSE: UL) is a Shopify Plus client. Even more potentially valuable as a growth catalyst is the addition of licensed cannabis stores fronts. After Canada legalized cannabis on Oct. 17, 2018, Shopify will definitely benefit from more and more companies opening up.

Cannabis a Positive Catalyst

Limited supply and unknown regulatory changes in cannabis is a potential headwind limiting Shopify’s growth. If markets priced in much of the growth ahead on the basis of companies making billions in sales, SHOP stock is at risk of falling.

Still, management did not model for exuberant growth from the legalization of cannabis. In fact, it is broadening its market geographically to capture growth.

Global Growth

Shopify recognizes the importance of international markets for expansion. With 70% of the largest e-commerce markets being non-English speaking, Shopify must localize its platform in each region it enters.

In Germany, Shopify tailored Shopify Payments to accept not just credit card payments but also local bank transfers. This approach, customizing the uniqueness of the German markets, will likely result in strong growth in this region.

Shopify Still Losing Money

Despite the highlights as mentioned above, plus the 55% Y/Y GMV expansion to $10 billion, Shopify still reported an adjusted operating loss of $3.6 million in the third quarter. Its adjusted net income was $4.5 million or just $0.04 a share. It ended Q3 with $1.6 billion in cash and cash equivalents.

The profits look small but fast-growing firms like Amazon.com (NASDAQ: AMZN) reported losses and minuscule profits for years before the stock topped out at over $2000 a share in the last year.

Outlook

Shopify raised its forecast for the full year. It now expects revenue growing 55% and in the range of $1.45 billion and $1.55 billion. Operating income will be $8 million to $10 million.

For the fourth quarter report, scheduled for Feb. 14, the firm expects revenue of $315 million – $325 million. Adjusted income will be between $16 and $18 million. Shopify will also spend $30 million in stock-based compensation in that period and $105 million for the full year.

Limited Risk to Growth

Shopify is not likely to report slowing growth in the near-term. Even though it is attracting big customers, its primary market is the small and medium merchant.

Its Shopify Plus targets such businesses and is not an area competitors are as interested in. So for the foreseeable future, expect the pricing model to stay the same, which in turn will lead to more merchants signing up.

Disclosure: the author does not own shares in any of the companies mentioned.

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