SHOP

3 Green Flags for Shopify's Future

Few companies have been on wilder rides over the past few years than Shopify (NYSE: SHOP). Since early 2019, its stock has been as high as $169 and as low as $19 and today it trades for around $78. The pandemic-induced pull-forward of business to e-commerce companies and the ensuing correction played a large part in the stock's performance. Only recently are things beginning to normalize.

However, investors always need to be looking forward as past results are no guarantee of the future. And finding catalysts at Shopify that the market might be missing can be key to assessing whether it's a buy now. With that in mind, here are three areas that are green flags for Shopify's future.

Accelerating growth in key areas

Shopify generates the majority of its revenue from its merchant solutions segment by charging fees for transactions that take place on the platform. In light of this, investors should keep an eye on two important metrics: gross merchandise volume (GMV) and gross payments volume (GPV).

Gross merchandise volume is the total dollar value of orders processed on the Shopify platform. In the fourth quarter of 2023, Shopify reported GMV of $75 billion. This was a year-over-year increase of 23% and continued a trend of accelerating GMV growth.

Metric

Q1 2023

Q2 2023

Q3 2023

Q4 2023

GMV

$50 billion

$55 billion

$56 billion

$75 billion

Year-over-year growth

15%

17%

22%

23%

Data source: Shopify.

The story is similar for GPV, which is the amount of GMV that is processed through Shopify's payments system. Shopify also collects a fee based on this dollar amount.

Metric

Q1 2023

Q2 2023

Q3 2023

Q4 2023

GPV

$28 billion

$32 billion

$33 billion

$45 billion

Year-over-year growth

25%

27%

31%

32%

Data source: Shopify.

Top-line results are stronger than they appear

Shopify reported Q4 2023 revenue growth of 24%, which is consistent with the last several quarters. In its Q1 2024 guidance, the company noted it expects revenue growth to be in the low-20% range. However, there's a caveat to that guidance worth mentioning.

After spending years building out its own logistics network organically and through acquisition, Shopify decided in 2023 to sell its logistics business to Flexport. As is often the case, this sale has an impact on results. Excluding the impact of this sale, Shopify anticipates an additional 5% to 6% in revenue growth in Q1. The logistics business sale also impacted Q1 gross margin guidance, which the company expects to be 4% to 5% higher excluding this impact.

Controlling expenses and generating cash

Shopify reported operating expenses of $773 million in Q4, a result that was 22% lower than in Q4 2022. As a percentage of revenue, operating expenses were also lower year over year. Operating expenses represented 36% of revenue, down from 57% in the year-ago quarter. Much of this result was due to the aforementioned sale of the logistics business and also headcount reductions. Whatever the reason, this improved operating efficiency is a good sign.

An important aspect of Shopify's operating expenses is its stock-based compensation. The total amount of such compensation increased by 12% in fiscal 2023 but as a percentage of revenue, it dropped more than 1%. This helped contribute to a full-year 2023 free cash flow margin of 13%, up significantly from a negative free-cash-flow margin of 3% in 2022.

The bottom line for investors

Shopify plays an important role for thousands of businesses of all sizes. Now that the pandemic is receding, management is making smart decisions to improve profitability and generate cash. Its strong growth profile and improving operating efficiencies are bright signs for the future.

Where to invest $1,000 right now

When our analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for two decades, Motley Fool Stock Advisor, has more than tripled the market.*

They just revealed what they believe are the 10 best stocks for investors to buy right now… and Shopify made the list -- but there are 9 other stocks you may be overlooking.

See the 10 stocks

*Stock Advisor returns as of March 8, 2024

Jeff Santoro has positions in Shopify. The Motley Fool has positions in and recommends Shopify. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Tags

More Related Articles

Info icon

This data feed is not available at this time.

Sign up for the TradeTalks newsletter to receive your weekly dose of trading news, trends and education. Delivered Wednesdays.