Shopify Inc.

Shopify Inc. (TSX: SHOP) offers cloud-based, e-commerce platform for small and medium-sized businesses. The group operates in two segments: subscription solutions and merchant solutions. The Company's software is used by merchants to run their business across all sales channels, including Web and mobile storefronts, physical retail locations, social media storefronts and marketplaces.

Key Highlights

• Monthly Recurring Revenue (MRR) growth accelerated in the quarter as merchants on the extended 90-day free trial converted themselves into paying merchants. The company had USD 74.4 million of MRR in 3Q 2020 compared to USD 50.7 million in the previous corresponding period.

Source: Company

• During 3Q 2020, the company had strong momentum in Gross Merchandise Volume (GMV), buoyed by restrictions related to COVID-19, as consumers increasingly looked for ways to purchase at a safe distance, utilizing e-commerce. GMV in this quarter grew 108.6% as compared on a Y-o-Y basis.

Source: Company

• Demand for Shopify Capital remained strong in Q3, with merchants received USD 252.1 million in funding across the U.S., the U.K. and Canada. This represents a 78.8% increase of the financing on a Y-o-Y basis.

• The company had USD 6.12 billion in cash, cash equivalents and marketable securities, compared with USD 2.46 billion on December 31, 2019.

Financial Overview of Q3 2020

Source: Company

• Total revenue in Q3 2020 increased 96% to USD 767.4 million, compared to USD 390.5 million in pcp.

• Gross profit in Q3 2020 increased 87.0% to USD 405.1 million, compared to USD 216.7 million in pcp.

• Operating income for the reported quarter was USD 50.6 million, or 7% of revenue, versus a loss of USD 35.7 million, or 9% of revenue in pcp.

• Net income for the current quarter was USD 191.1 million, or USD 1.54 per diluted share, compared with a net loss of USD 72.8 million, or USD 0.64 per diluted share, on a Y-o-Y basis.

Revenue bifurcation

Source: Company

Subscription solutions revenues increased USD 79.7 million or 48.1%, to USD 245.2 million, in Q3 2020 on Y-o-Y basis. Merchant solutions revenues increased USD 297.2 million or 132.1% to USD 522.1 million, from USD 225 million as compared on a Y-o-Y basis.

Risk associated with investment

The company is exposed to a variety of risks, including foreign currency exchange fluctuations, changes in interest rates, the concentration of credit and inflation and technological risk.

Stock recommendation

Despite the uncertainty surrounding the macro environment, the company remains strongly positioned in helping entrepreneurs during this period of rapid change in the retail landscape. Meanwhile, the company announced a partnership with the government of Canada through the “Go Digital Canada” programme to bring thousands of small Canadian businesses online and help them in adapting the digital economy. We expect the demand for the group’s offerings to remain high as more players would conduct their business online amid the current operating environment. Further, the group expects entrepreneurs to continue to recognize the importance of multi-channel selling and direct-to-consumer fulfilment, and for consumer concerns about COVID-19 to drive further adoption of digital commerce while reinforcing the behaviour of buyers already shopping online. Shopify remains uniquely positioned to level the playing field for entrepreneurs during this period of rapid change in the retail landscape. Therefore, based on the above rationale and outlook, we give a ‘Hold’ rating on this stock at the closing price of CAD 1210.74 on 2 November 2020.

SHOP daily technical chart. Source: Refinitiv (Thomson Reuters)

Waste Connections

Waste Connections (TSX: WCN) is the third-largest integrated provider of traditional solid waste and recycling services in North America, operating 86 active landfills, 124 transfer stations, and 66 recycling operations. The firm serves residential, commercial, industrial, and energy end markets.

Key highlights

• Increase in Quarterly Dividend: At the time when most of the companies are either suspending or minimizing the dividend amount, the company has declared a 10.8% increase in the regular quarterly cash dividend on its common shares.  The regular quarterly cash dividend, which increases from USD 0.185 per common share to USD 0.205 per common share, will be paid on November 25, 2020, to shareholders with a record date of November 10, 2020. 

• Higher Adjusted free cash flow: The company managed to increase the Adjusted free cash flow to USD 284 million in Q3 2020 as against USD 259 million in the previous corresponding period. The adjusted free cash flow as a % to revenue stood at 20.4% against 18.3% on a Y-o-Y basis. 

Financial overview of Q3 2020

Source: Company

During 3Q 2020 the business of the company continued to be impacted by COVID-19, but to a lesser extent than in the prior period.

• Revenue in Q3 2020, stood at USD 1.390 billion, decreased USD 22.8 million from USD 1.412 billion recorded in the year-ago period. Operating income was USD 230.7 million, compared to USD 236.6 million in the same period a year ago. The reason behind this fall in revenue was mainly suspended or reduced services due to COVID-19.

• Net income attributable to Waste Connections in Q3 2020 was USD 158.0 million, or USD 0.60 per share on a diluted basis as against USD 159.1 million, or USD 0.60 per share on a diluted basis in Q3 2019. 

• Adjusted EBITDA in Q3 2020 was USD 432.6 million, as compared to adjusted EBITDA of USD 443.6 million in the previous corresponding period. 

Risk associated with investment 

A prolonged lockdown or any other containment measures announced by the government would result in a tepid volume from the commercial segment. As a result, the company’s performance may impact adversely.

Valuation Methodology (Illustrative): Price to Earnings

Note: All forecasted figures and peers have been taken from Thomson Reuters

Stock recommendation

The challenges posed by the outbreak COVID-19 on the global economy persisted through the third quarter of 2020 and continue to impact the demand for the Company’s services across the U.S. and Canada and across a variety of lines of business, including commercial collection and solid waste and exploration and production (“E&P”) waste disposal. We expect the volume of the solid waste, the commercial collection to improve in the coming quarters, as most of the industrial and manufacturing activities are resuming gradually. Therefore, based on the above rationale and valuation, we have given a ‘Hold’ rating at the closing price of CAD 131.7 on November 2, 2020. We have considered Clean Harbors Inc, Advanced Disposal Services Inc, Waste Connections Inc, etc. as the peer group for the comparison.

WCN daily technical chart. Source: Refinitiv (Thomson Reuters)

Disclaimer

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