E-Commerce software platform Shopify (NYSE:SHOP) reported Q3 FY2023 results topping analysts' expectations, with revenue up 25.5% year on year to $1.71 billion. Turning to EPS, Shopify made a non-GAAP profit of $0.24 per share, improving from its loss of $0.02 per share in the same quarter last year.
Is now the time to buy Shopify? Find out by accessing our full research report, it's free.
Shopify (SHOP) Q3 FY2023 Highlights:
- Revenue: $1.71 billion vs analyst estimates of $1.67 billion (2.64% beat)
- EPS (non-GAAP): $0.24 vs analyst estimates of $0.14 ($0.10 beat)
- Free Cash Flow of $276 million, up 185% from the previous quarter
- Gross Margin (GAAP): 52.6%, up from 48.5% in the same quarter last year
"Our third-quarter results demonstrate the progress we are making to further solidify Shopify's position as the global leader in commerce," said Harley Finkelstein, President of Shopify.
Originally created as an internal tool for a snowboarding company, Shopify (NYSE:SHOP) provides a software platform for building and operating e-commerce businesses.
E-commerce Software
While e-commerce has been around for over two decades and enjoyed meaningful growth, its overall penetration of retail still remains low. Only around $1 in every $5 spent on retail purchases comes from digital orders, leaving over 80% of the retail market still ripe for online disruption. It is these large swathes of the retail where e-commerce has not yet taken hold that drives the demand for various e-commerce software solutions.
Sales Growth
As you can see below, Shopify's revenue growth has been strong over the last two years, growing from $1.12 billion in Q3 FY2021 to $1.71 billion this quarter.
This quarter, Shopify's quarterly revenue was once again up a very solid 25.5% year on year. However, its growth did slow down compared to last quarter as the company's revenue increased by just $20 million in Q3 compared to $186 million in Q2 2023. While we'd like to see revenue increase by a greater amount each quarter, a one-off fluctuation is usually not concerning.
Looking ahead, analysts covering the company were expecting sales to grow 17.9% over the next 12 months before the earnings results announcement.
While most things went back to how they were before the pandemic, a few consumer habits fundamentally changed. One founder-led company is benefiting massively from this shift and is set to beat the market for years to come. The business has grown astonishingly fast, with 40%+ free cash flow margins, and its fundamentals are undoubtedly best-in-class. Still, its total addressable market is so big that the company has room to grow many times in size. You can find it on our platform for free.
Profitability
What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Shopify's gross profit margin, an important metric measuring how much money there's left after paying for servers, licenses, technical support, and other necessary running expenses, was 52.6% in Q3.
That means that for every $1 in revenue the company had $0.53 left to spend on developing new products, sales and marketing, and general administrative overhead. While its gross margin has improved significantly since the previous quarter, Shopify's gross margin is still poor for a SaaS business. It's vital that the company continues to improve this key metric.
Key Takeaways from Shopify's Q3 Results
Sporting a market capitalization of $62.7 billion, more than $4.92 billion in cash on hand, and positive free cash flow over the last 12 months, we believe that Shopify is attractively positioned to invest in growth.
We were impressed by Shopify's free cash flow generation this quarter, which beat analysts' estimates with flying colors ($276 million vs $193 million consensus). The company expects to bring in even more free cash flow next quarter, showing that the steps it took to unlock greater profitability earlier in the year are working. Its revenue also outperformed Wall Street's expectations, driven by better-than-expected gross merchandise volume and gross payments volume. We track these metrics because they show how much Shopify is increasing its reach, and based on these numbers, there's no doubt the company is growing its ecosystem. In terms of new products, Shopify launched the Retail Plan, which is designed to help brick-and-mortar retailers with payments and building a simple online presence. Overall, we think this was a really good quarter that should please shareholders. The stock is up 16.9% after reporting and currently trades at $57.07 per share.
Shopify may have had a good quarter, but does that mean you should invest right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.
One way to find opportunities in the market is to watch for generational shifts in the economy. Almost every company is slowly finding itself becoming a technology company and facing cybersecurity risks and as a result, the demand for cloud-native cybersecurity is skyrocketing. This company is leading a massive technological shift in the industry and with revenue growth of 50% year on year and best-in-class SaaS metrics it should definitely be on your radar.
Join Paid Stock Investor Research
Help us make StockStory more helpful to investors like yourself. Join our paid user research session and receive a $50 Amazon gift card for your opinions. Sign up here.
The author has no position in any of the stocks mentioned in this report.