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. 

Key Updates:

• Strong growth from the Merchant solutions segment: In Q1FY22, the company reported revenue of USD 858.8 million, grew 28.6% on y-o-y basis. This increase was a result of an increase in the Shopify Payments penetration rate, growth in the number of merchants using the platform, and an increase in currency conversion fees. Notably, during the quarter, the company’s penetration rate was 50.9% versus 46.3% in pcp. This resulted to a current Gross Merchandise Volume (GMV) of USD 22 billion v/s USD 17.3 billion in pcp. We expect the above trend to continue in the coming quarter, supported by a possible increase in the number of merchants.

• Expanding into New Markets: During the first quarter of FY22, the company introduced Shopify POS hardware with integrated payments to three new markets, namely Belgium, Denmark and Spain and is currently available across eleven markets. This technology is expected to simplify the cross-border transaction and is expected to boost GMV in the coming days.

• Better Customer relationship management: The company reported strong client-relationship management, and, hence, the company reported that more users have signed up to the digital shopping companion. Moreover, the company has also announced several lucrative offers to its clients which has resulted in higher-value customers and climbing of repeat buyers, which is encouraging. This is likely to boost the company’s sales volumes in the coming days.

Risks associated with the investment:

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. Moreover, the company is witnessing an increment in research and development expense in order to stay competitive in the industry, which might pose a challenge to the operating margin. 

Q1FY22 Financial Highlights:

Q1FY22 Income Statement Highlights (Source: Company Report)

• SHOP announced its first quarter result, wherein the company posted revenues of USD 1,203.6 million, surged from USD 988.6 million in pcp. The growth was primarily due to higher income from both merchant solutions and subscription segments.
• The company reported a higher gross profit of USD 637.6 million in Q1FY22, as compared to USD 558.7 million in pcp, supported by elevated revenue, partially offset by higher cost of revenue.
• The period was marked by higher sales & marketing expense, increase in Research & development costs, coupled with higher general & administrative expense. Total operating expenses stood higher at USD 735.6 million, increased from USD 439.8 million in pcp. Hence, the company reported a loss from operations amounting USD 97.9 million v/s a net profit of USD 118.8 million pcp.
• During the quarter, the group reported a net unrealized loss on equity and other investments amounting USD 1,677.4 million which remained as a drag. Hence, the company’s reported a net loss of USD 1,474.4 million v/s a net profit of USD 1,258.4 million in pcp.
  

Valuation Methodology (Illustrative): EV to Sales based

Stock Recommendation:

During the first quarter of Q1FY22, the company added thousands more POS Pro retail locations and also promoted through in-app commerce via Facebook and Instagram. These resulted to a higher GMV and has supported the sales volume and revenue. We have valued the stock using the EV to Sales based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Intuit Inc, Cloudflare Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of SHOP at the last closing price of CAD 438.64 on June 22, 2022. Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing. 

One-Year Technical Price Chart (as on June 22, 2022). Source: REFINITIV, Analysis by Kalkine Group

Note: The reference data in this report has been partly sourced from REFINITIV 

Technical Analysis Summary

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