Shopify (NYSE:SHOP) Surprises With Q4 Sales

Full Report / February 15, 2023
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E-Commerce software platform Shopify (NYSE:SHOP) reported results ahead of analyst expectations in the Q4 FY2022 quarter, with revenue up 25.7% year on year to $1.73 billion. Shopify made a GAAP loss of $623.7 million, down on its loss of $371.3 million, in the same quarter last year.

Shopify (SHOP) Q4 FY2022 Highlights:

  • Revenue: $1.73 billion vs analyst estimates of $1.65 billion (5.11% beat)
  • EPS (non-GAAP): $0.07 vs analyst estimates of -$0.02 ($0.09 beat)
  • Free cash flow of $247.8 million, up from negative free cash flow of $228 million in previous quarter
  • Gross Margin (GAAP): 46%, down from 50.1% same quarter last year

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

Creating an E-Commerce business is a very technical and complex process that serves as a high barrier to entry for many entrepreneurs.

Before selling a product online a business needs to have a functioning website, a payment processing system, inventory management, and a fulfilment process at the bare minimum. Because of the high technical barriers to starting an online business, many E-Commerce companies could not function without a third party platform that handles everything for them. Shopify’s cloud based software aims to provide everything a business needs to sell online so that founders can focus on making products their customers love.

Many different types of online businesses trust Shopify with handling the digital infrastructure crucial for their operations. From solo entrepreneurs paying as little as $5 per month all the way up to large enterprises with much more lucrative contracts, Shopify provides the necessary tools to start, grow, market, and manage an online retail business.

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.

Other providers of e-commerce software include: BigCommerce (NASDAQ:BIGC), GoDaddy (NYSE:GDDY), and Squarespace (NYSE:SQSP)

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 $977.7 million in Q4 FY2020, to $1.73 billion.

Shopify Total Revenue

This quarter, Shopify's quarterly revenue was once again up a very solid 25.7% year on year. On top of that, revenue increased $368.8 million quarter on quarter, a very strong improvement on the $71.1 million increase in Q3 2022, which shows acceleration of growth, and is great to see.


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 46% in Q4.

Shopify Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.46 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 dropped significantly from the previous quarter, which is probably the opposite of what shareholders would like it to do.

Cash Is King

If you have followed StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Shopify's free cash flow came in at $247.8 million in Q4, up 5.66% year on year.

Shopify Free Cash Flow

Shopify has burned through $186.5 million in cash over the last twelve months, resulting in a negative 3.33% free cash flow margin. This below average FCF margin is a result of Shopify's need to invest in the business to continue penetrating its market.

Key Takeaways from Shopify's Q4 Results

With a market capitalization of $63.7 billion, more than $5.05 billion in cash and the fact it is operating close to free cash flow break-even the company is in a strong financial position to invest in growth.

We liked to see that Shopify beat analysts’ revenue expectations pretty strongly this quarter. And we were also glad to see good revenue growth. However, gross margins have been trending down. Overall, we think this was a solid quarter. But the market was likely expecting more and the company is down 0.71% on the results and currently trades at $53 per share.

Is Now The Time?

Shopify may have had a good quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. We cheer for everyone who is making the lives of others easier through technology, but in case of Shopify we will be cheering from the sidelines. Its revenue growth has been strong, though we don't expect it to maintain historical growth rates. Unfortunately, its gross margins show its business model is much less lucrative than the best software businesses.

Given its price to sales ratio based on the next twelve months is 10.3x, Shopify is priced with expectations of a long-term growth, and there's no doubt it is a bit of a market darling, at least for some. While we have no doubt one can find things to like about the company, we think there might be better opportunities in the market and at the moment don't see many reasons to get involved.

The Wall St analysts covering the company had a one year price target of $45.9 per share right before these results, implying that they didn't see much short-term potential in the Shopify.

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