Shopify Inc. (TSX: SHOP) is a Canada-based e-commerce platform catering primarily to small and midsize businesses. It provides internet infrastructure for commerce, offering tools to start, grow, market, and manage a retail business. The firm currently offers two types of offerings comprising subscription solutions and merchant solutions.

Key Highlights:

• Increase in Gross merchandise value: For Q1FY22, the company witnessed a 15.6% increase in its gross merchandise value to USD 43.19 billion against USD 37.34 billion in Q1FY21. The phenomenal growth of the past two years compounds an annual growth rate of 57%, which is depicted below. GMV represents the total dollar values of the orders which facilitated through the company’s platform, and the higher GMVs showcase the success of the merchants and the strength of the company's platform.

Source: Company presentation

• Increased revenue: During Q1FY22, the group reported an increase in revenue to USD 1.20 billion vs USD 988.64 million in Q1FY21. The major push to the revenue was from its Merchant Solutions segment (contributing 71.4% in total revenues), which reported an increase in sales to USD 858.86 million in Q1FY22, vs USD 667.96 million in Q1FY21.  

• Acquisition update: The company reached an agreement to acquire Deliverr Inc. for a total value of USD 2.1 billion. This acquisition will enable the company to gain visibility and control of the movements along with the supply chain, enabling merchants to offer and attain faster delivery promises across the channels.

Source: Company presentation

• Outlook updates: The management stated the revenue will be slightly lower in the first half of FY22, but it will scale back to the peak in Q4FY22. The annual Merchant Solutions revenue growth anticipated to be more than double as compared to subscription solution revenue growth. The company is committed to re-invest all gross profits in dollar terms back into the business to achieve its growth objectives in terms of exploring new geographies, new offerings, etc.

Risks associated with investment

The company is widely exposed to slow down in the economy in terms of declining freelancing opportunities, rising interest rates which are slowing down expansion and opening of new businesses, etc. Further, the ongoing issues between Russia and Ukraine also hampered the collections since the group stopped collection of fees from Ukrainian merchants and suspended operations in Russia and Belarus.  

Financial overview of Q1FY22 (Expressed in thousands of USD)

Source: Company Filing 

• During Q1FY22 the group reported an increase of 21.7% in its total revenues to USD 1.20 billion as compared to USD 988.64 million during Q1FY21. Most of the revenue increase is from Merchant solutions during Q1FY22, which contributes 71.4% to the total revenue.
• The total cost of revenues increased to USD 565.98 million in Q1FY22 against USD 429.93 million in Q1FY21. The increased cost is because of the rising expenses to sustain the growth in traffic and functionality of the platform across various locations.
• For Q1FY22, the company witnessed an increase in gross profit to USD 637.63 million against the USD 558.71 million during Q1FY21. Gross profits decreased to 53.0% of the total revenues in Q1FY22 from 56.5% in Q1FY21 on account of Shopify payments constituting a higher share of total revenues and an increase in infrastructure and hosting costs.
• Due to increased operating expenses and loss on equity investments during the quarter, the group posted net loss of USD 1.47 billion during Q1FY22 as compared to the net income of USD 1.25 billion in Q1FY21.

Valuation Methodology (Illustrative): EV to Sales based

*1USD=1.30CAD

Analysis by Kalkine Group

Stock Recommendation:

The group reported an increase in total revenue of USD 1.20 billion during Q1FY22 against USD 988.64 million in Q1FY21, where both of its segments that are: Merchant solutions grew by 28.6% and Subscription solutions grew by 7.5% in Q1FY22. The net loss for the Q1FY22 of USD 1.47 billion was on account of a net unrealized loss on equity and other investments of USD 1.7 billion in that same period. The optimistic outlook from the management and the growing gig economy are a few of the important factors for reviving the success story of Shopify in the coming months.   On the valuation front, the stock is measured on the EV to sales based multiple and we have considered Cloudflare Inc., Twilio Inc., etc as the peer group for the comparison.

Therefore, based on the above rationale and valuation, we recommend a “ Buy” rating at the last closing price of CAD 462.28 on May 12, 2022. Additionally, the 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 of May 12, 2022). Analysis by Kalkine Group

The reference data has been partly sourced from REFINITV

 Technical Analysis Summary

Disclaimer

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