Shopify Inc.

Shopify Inc. (TSX: SHOP) offers an e-commerce platform primarily to small and midsize businesses and operates through two segments, namely subscription solutions and merchant solutions. The subscription segment allows Shopify merchants to conduct e-commerce on a variety of platforms, while the Merchant solutions are add-on products for the platform that facilitate e-commerce and include Shopify Payments.

Key Highlights:

• Consistent Revenue growth: The company reported strong revenue supported by tremendous growth in Subscription and Merchant Solutions segments. During Q1 2021, revenue soared 110% to USD 988.6 million from USD 470.0 million in Q1 2020. Additionally, during FY16 to FY20, revenue grew from USD 389.3 million to USD 2,929.5 million, which is worth mentioning.

Source: Company Presentation

• Increased adoption of Products: Customers are heavily relying on the Shopify products and frequently adopting them. Gross payments volume (GPV) for the Shopify products surged by 135% from USD 7.3 billion during Q1 2020 to USD 17.3 billion in Q1 2021. Furthermore, the penetration rate of Gross Merchandise Volume (GMV) increased to 46% during Q1 2021 from 42% in pcp. Additionally, during Q1 2021, the monthly active users increased to 24 million, an increase of 26% from 19 million in pcp.

Source: Company Presentation

• Enhanced Profitability: The company has adopted powerful and efficient business model over the years, where it is focusing on growth per dollar and following disciplined cost management for enhancing its profitability. Hence, SHOP has successfully lowered its input costs, resulted in growth in Adjusted Gross Profit, which is a key positive.

Source: Company Presentation

• Improved Operating Leverage: Backed by the astonishing revenue growth and sound capital allocation, the company improved its operating leverage, where SHOP succeeded in curbing all the major expenses. In comparison to Q1 2020, adjusted G&A expense decreased to 18% from 30%, adjusted R&D expense dropped 12% from 17%. Altogether, Operating leverage dropped to 36% in Q1 2021 from 58% in pcp.

Source: Company Presentation

Q1 FY21 Financial Highlights:

• SHOP announced its quarterly result, wherein the company posted revenues of USD 988.647 million, accelerated 110% yoy from USD 470.001 million in the previous corresponding period (pcp). The increase was primarily due to 137% yoy surge in revenue growth from the Merchant Solutions, driven by increased Gross Merchandise Volume. Additionally, Subscription Solutions revenue increased by 71% yoy, primarily due to more merchants joining the platform.

• Monthly Recurring Revenue (MRR) during Q1 2021 stood at USD 89.9 million, accelerated 62% yoy from USD 55.4 million in Q1 2020 as more merchants joined the platform and POS Pro contributed to the revenue.

• GMV for Q1 2021 was USD 37.3 billion, an increase of USD 19.9 billion, with growth accelerating to 114% over the first quarter of 2020. Gross Payments Volume (GPV) grew to USD17.3 billion, which accounted for 46% of GMV processed in the quarter, versus USD 7.3 billion, or 42%, for the first quarter of 2020.
• Gross profit surged to USD 558.716 million, from USD 256.950 million in pcp, thanks to the higher revenue, partially offset by a higher cost of revenues.
• Net income was recorded at USD 1,258.445 million v/s net loss of USD 31.429 million in pcp.
• Cash and cash equivalents stood at USD 2,785.571 million from USD 2,703.597 million in FY19.

Q1 FY21 Income Statement Highlights (Source: Company Reports)

Risks: The company’s operations might be hindered due to the entry of new player within the industry with innovative product offerings along with advanced technology services. Thus, the company must stay competitive in the industry, which might put pressure on the margins.

Stock Recommendation:

The company provides a multichannel commerce platform that enables merchants of all sizes to sell their products to consumers across the major locations. During Q1 2020, the operations witnessed strong growth supported by healthy GMV traction and new merchants’ addition on the platform, and which increased adoption of merchant solutions. The company is investing in long-term growth prospects and opting for International Expansion and the introduction of Retail POS etc. The Management highlighted that the growth in the Merchant solutions is likely to be continue in the coming years driven by continued GMV growth from existing merchants, new merchants joining coupled with expanded adoption of Shopify’s growing menu of merchant solutions like Shopify Payments, Shopify Shipping, and Shopify Capital across the major geographies. Hence, considering the aforesaid facts, we give a ‘Hold’ rating on the stock of SHOP at the closing price of CAD 1450.9 on April 30, 2021.

One-year Price Chart (as on April 30, 2021). Source: Refinitiv (Thomson Reuters)

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