Shopify (NYSE:SHOP) Surprises With Q4 Sales But Stock Drops

Full Report / February 13, 2024

E-Commerce software platform Shopify (NYSE:SHOP) reported Q4 FY2023 results topping analysts' expectations, with revenue up 23.6% year on year to $2.14 billion. It made a non-GAAP profit of $0.34 per share, improving from its profit of $0.07 per share in the same quarter last year.

Shopify (SHOP) Q4 FY2023 Highlights:

  • Revenue: $2.14 billion vs analyst estimates of $2.07 billion (3.3% beat)
  • EPS (non-GAAP): $0.34 vs analyst estimates of $0.30 (13.7% beat)
  • Free Cash Flow of $446 million, up 61.6% from the previous quarter
  • Gross Margin (GAAP): 49.5%, up from 46% in the same quarter last year
  • Market Capitalization: $114.7 billion

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 fulfillment 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 to handle the digital infrastructure crucial for their operations. From solo entrepreneurs paying as little as $5 per month up to large enterprises with much more lucrative contracts, Shopify provides the necessary tools to start, grow, market, and manage an online retail business.

Shopify has expanded its services as it's grown and now includes services such as credit, where it can underwrite merchants better than traditional banks because it has granular transaction data on their businesses. The company has also built an app store where developers can create tools for the Shopify ecosystem.

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.

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 strong over the last two years, growing from $1.38 billion in Q4 FY2021 to $2.14 billion this quarter.

Shopify Total Revenue

This quarter, Shopify's quarterly revenue was once again up a very solid 23.6% year on year. On top of that, its revenue increased $430 million quarter on quarter, a very strong improvement from the $20 million increase in Q3 2023. This is a sign of acceleration of growth and 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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 49.5% in Q4.

Shopify Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.50 left to spend on developing new products, sales and marketing, and general administrative overhead. Shopify's gross margin is poor for a SaaS business and it's dropped significantly since the previous quarter. This is probably the exact opposite of what shareholders would like to see.

Cash Is King

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Shopify's free cash flow came in at $446 million in Q4, up 80% year on year.

Shopify Free Cash Flow

Shopify has generated $905 million in free cash flow over the last 12 months, a decent 12.1% of revenue. This FCF margin stems from its asset-lite business model and gives it a decent amount of cash to reinvest in its business.

Key Takeaways from Shopify's Q4 Results

It was good to see Shopify beat analysts' revenue and free cash flow estimates this quarter. That was driven by better-than-expected gross merchandise volume ($75.1 billion vs estimates of $71.6 billion) and gross payments volume ($45.1 billion vs estimates of $42.1 billion), which led to outperformance in its merchant and subscription solutions segments. 

Some product highlights for 2023 include the launch of Magic and Sidekick. Both features use AI to make it easier for merchants to run their businesses and increase productivity. For example, one video showed the AI identifying which of the merchant's inventories were growing stale and automatically ran discounted promotions.

Looking ahead at Q1 2024, Shopify's revenue outlook topped Wall Street's forecasts as it expects to grow in the low 20% range (this growth would be in the mid-to-high 20% adjusting for its May 2023 sale of Deliverr, its old logistics business). On the other hand, the company guided for higher operating expenses compared to this quarter, spooking investors as in the short term, the projection contradicts management’s commentary from its recent analyst day regarding expense discipline. 

Zooming out, we think this was a good quarter, showing that the company is staying on track. With the stock trading at nearly 15x sales going into earnings, however, the market was likely expecting more. The stock is down 8.3% after reporting and trades at $81.75 per share.

Is Now The Time?

When considering an investment in Shopify, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.

Although Shopify isn't a bad business, it probably wouldn't be one of our picks. Although its , Wall Street expects growth to deteriorate from here. On top of that, its gross margins show its business model is much less lucrative than the best software businesses.

Shopify's price-to-sales ratio based on the next 12 months of 13.9x indicates that the market is definitely optimistic about its growth prospects. We can find things to like about Shopify and there's no doubt it's a bit of a market darling, at least for some. But we are wondering whether there might be better opportunities elsewhere right now.

Wall Street analysts covering the company had a one-year price target of $68.40 per share right before these results (compared to the current share price of $81.75), implying they didn't see much short-term potential in the Shopify.

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