E-Commerce software platform Shopify (NYSE:SHOP) reported Q1 FY2023 results topping analyst expectations, with revenue up 25.3% year on year to $1.51 billion. Shopify made a GAAP profit of $68 million, improving on its loss of $1.47 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) Q1 FY2023 Highlights:
- Revenue: $1.51 billion vs analyst estimates of $1.44 billion (5.09% beat)
- EPS (non-GAAP): $0.01 vs analyst estimates of -$0.04 ($0.05 beat)
- Free cash flow of $86 million, down 65.3% from previous quarter
- Gross Margin (GAAP): 47.5%, down from 53% same quarter last year
"Shopify's strong first quarter results demonstrate once again that we're the go-to solution powering businesses of all sizes, on every surface where they sell. The changes we're announcing today will ensure we keep pace with the high velocity of change before us, delivering the cutting-edge solutions our customers have come to expect from Shopify," said Shopify's President, Harley Finkelstein.
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 very strong over the last two years, growing from quarterly revenue of $988.6 million in Q1 FY2021, to $1.51 billion.
This quarter, Shopify's quarterly revenue was once again up a very solid 25.3% year on year. But the revenue actually decreased by $227 million in Q1, compared to $368.8 million increase in Q4 2022. If we take a closer look, we'll observe a similar revenue decline in the same quarter last year, which could suggest the decline is seasonal. However, the management is guiding for a further drop in revenue in the next quarter, so it is definitely worth keeping an eye on the situation.
Ahead of the earnings results the analysts covering the company were estimating sales to grow 17.9% 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 47.5% in Q1.
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. While it improved significantly from the previous quarter this would still be considered a low gross margin for a SaaS company and we would like to see the improvements continue.
Key Takeaways from Shopify's Q1 Results
With a market capitalization of $65.6 billion, more than $4.86 billion in cash and the fact it is operating close to free cash flow break-even, we're confident that Shopify has the resources it needs to pursue a high growth business strategy.
We liked to see that Shopify beat analysts’ gross merchandise value, revenue, and operating profit expectations pretty strongly this quarter. And we were also glad to see good revenue growth, which will continue in the next quarter as the company guided Q2 to feature a similar growth rate vs. Q1 (in-line with Consensus expectations). Shopify announced that it is selling its logistics business to Flexport (expected to close in 2Q23), and Shopify will receive 13% equity interest in Flexport. The market is likely cheering this deal because it should improve the company's operating leverage and capex profile. Lastly, Shopify announced layoffs that will impact roughly 20% of its workforce. Overall, we think this was a really good quarter, that should leave shareholders feeling very positive. The company is up 21.2% on the results and currently trades at $56.11 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.
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The author has no position in any of the stocks mentioned.