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Shopify (NYSE:SHOP) Q3 Sales Beat Estimates, Stock Soars In The Pre-market


Jabin Bastian /
2022/10/27 7:08 am EDT
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E-Commerce software platform Shopify (NYSE:SHOP) announced better-than-expected results in the Q3 FY2022 quarter, with revenue up 21.5% year on year to $1.36 billion. Shopify made a GAAP loss of $158.4 million, down on its profit of $1.14 billion, in the same quarter last year.

Is now the time to buy Shopify? Access our full analysis of the earnings results here, it's free.

Shopify (SHOP) Q3 FY2022 Highlights:

  • Revenue: $1.36 billion vs analyst estimates of $1.33 billion (2.31% beat)
  • EPS (non-GAAP): -$0.02 vs analyst estimates of -$0.07
  • Free cash flow was negative $228 million, down from positive free cash flow of $301.2 million in previous quarter
  • Gross Margin (GAAP): 48.4%, down from 54.1% same quarter last year

"Shopify is the central nervous system that powers millions of businesses around the world. During Q3, merchants continued to recognize Shopify's exceptional value and increased their adoption of our essential tools and innovative solutions. Our merchant solutions revenue as a percentage of GMV - or Merchant Solutions attach rate - climbed to 2.14%, the highest level in Shopify's history," said Harley Finkelstein, Shopify's President.

Originally created as an internal tool for a snowboarding company, Shopify (NYSE:SHOP) provides a software platform for building and operating e-commerce businesses.

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 impressive over the last two years, growing from quarterly revenue of $767.4 million in Q3 FY2020, to $1.36 billion.

Shopify Total Revenue

This quarter, Shopify's quarterly revenue was once again up a very solid 21.5% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $71.1 million in Q3, compared to $91.4 million in Q2 2022. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Ahead of the earnings results the analysts covering the company were estimating sales to grow 20% over the next twelve months.

In volatile times like these we look for robust businesses with strong pricing power. Unknown to most investors, this company is one of the highest-quality software companies in the world, and their software products have been the default standard in critical industries for decades. The result is an impressive business that is up an incredible 18,152% since the IPO. 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 is left after paying for servers, licenses, technical support and other necessary running expenses was at 48.4% in Q3.

Shopify Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.48 left to spend on developing new products, marketing & sales and the general administrative overhead. This would be considered a low gross margin for a SaaS company and it has been going down over the last year, which is probably the opposite direction shareholders would like to see it go.

Key Takeaways from Shopify's Q3 Results

Since it has still been burning cash over the last twelve months it is worth keeping an eye on Shopify’s balance sheet, but we note that with a market capitalization of $36.9 billion and more than $4.94 billion in cash, the company has the capacity to continue to prioritise growth over profitability.

It was good to see Shopify outperform Wall St’s revenue expectations this quarter. That feature of these results really stood out as a positive. Overall, this quarter's results seemed pretty positive and shareholders can feel optimistic. The company is up 7.17% in the pre-market and currently trades at $31.2 per share.

Should you invest in Shopify right now? It is important that you take into account its valuation and business qualities, as well as what happened in the latest quarter. We look at that in our actionable 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 70% year on year and best-in-class SaaS metrics it should definitely be on your radar.

The author has no position in any of the stocks mentioned.