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 

• Consistent revenue growth: The company's revenue was bolstered by robust growth in the Subscription and Merchant Solutions sectors. Revenue increased by 110% to USD 988.6 million in Q1 2021, compared to USD 470.0 million in Q1 2020. Furthermore, sales increased from USD 389.3 million to USD 2,929.5 million from FY16 to FY20, which is noteworthy.

Source: Company

• Improved operating leverage: The company enhanced its operating leverage, as it succeeded in reducing all key expenditures, thanks to remarkable revenue growth and smart capital allocation. Adjusted G&A spending fell to 18% from 30% in Q1 2020, while adjusted R&D expenditure fell to 12% from 17%. Overall, operating leverage decreased from 58% in Q1 2020 to 36% in Q1 2021.

Source: Company

• Enhanced profitability: Over the years, the company has developed a robust and efficient business strategy that focuses on dollar growth and employs strict cost control to increase profitability. Consequently, it has effectively reduced its input costs, resulting in an increase in Adjusted Gross Profit, which is noteworthy.

Source: Company

Financial overview of Q1 2021 (Expressed in thousands of USD)

Source: Company

• In Q1 2021, the company reported total revenue of USD 988.6 million, a 110% increase from the comparable quarter in 2020. The rise in revenue was primarily due to healthy performance from Subscription Solutions and Merchant Solutions which increased 137% and 71%, respectively.
• Gross profit in Q1 2021 accelerated 117% to USD 558.7 million, compared to USD 256.9 million in the previous corresponding period. Thanks to the higher revenue, partially offset by a higher cost of revenues.
• Operating income in the reported quarter stood at USD 118.8 million, or 21% of revenue, against a loss of USD 73.2 million in the previous corresponding period.
• The company reported net income of USD 1,258.4 million in Q1 2021, compared to a net loss of USD 31.4 million in Q1 2020. Net income includes a USD 1,250.6 million unrealized gain on its equity investment in Affirm as a result of its IPO in January 2021.
• On March 31, 2021, the company had USD 7,870 million in cash, cash equivalents and marketable securities, compared with USD 6,390 million on December 31, 2020. 

Risks associated with investment

The company is exposed to a variety of risks, including foreign currency exchange fluctuations, changes in interest rates, concentration of credit and inflation and technological risk. Furthermore, its operations might be hindered due to the entry of new player within the industry with innovative product offerings along with advanced technology services, which might put pressure on the margins.

Stock recommendation

As digital commerce tailwinds remained strong and merchants took use of the platform's variety of features, the company maintained its positive momentum into 2021. Moreover, the organization is focused on developing a commerce operating system that will help define the future of retail, while its merchant-first business model enables to benefit both merchants and the company from the huge potential afforded by the expansion of digital commerce. Hence, considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock of SHOP at the closing price of CAD 1,479.47 on June 02, 2021.

1-Year Price Chart (as on June 02, 2021). Analysis by Kalkine Group

Constellation Software Inc.

Constellation Software Inc. (TSX: CSU), is engaged in the development, installation, and customization of software. The company acquire, manages, and builds vertical market software (VMS) businesses. It is catering its services to both segments, the public sector, and the private sector.

Key highlights

• Purchased FICO’s Collection and Recovery Business: Recently, the company entered into a binding agreement for the purchase and sale of FICO’s Collection and Recovery business to Constellation’s Jonas Software operating group, a leading provider of enterprise management software solutions. The company is confident that Jonas will continue to invest in these solutions and support its clients.
• Increase in cash from operating activities along consistent free cash flows:In Q1 2021, the company increased its cash flows from operations to USD 495 million compared to USD 361 million in the previous corresponding period. While Free cash flow available to shareholders stood at USD 269 million compared to USD 311 million in pcp.
• Industry beating margins: The resilient business and management’s solid determination along prudent steps helped in leaping the industry median margins on gross margin and EBITDA margin fronts in Q1 2021, which is a key positive. The chart below gives a glimpse of this.

• Healthy Liquidity:On the back of healthy operations, the company managed to increase its cash balance by USD 442 million to USD 758 million on December 31, 2020, compared to USD316 million at December 31, 2019.

Financial overview of Q1 2021 (In millions of U.S. dollars)

Source: Company

• In Q1 2021, total revenues posted by the company stood at USD 1,176 million, an increase of 23%, compared to USD 953 million in the previous corresponding period. The rise in revenue was primarily due to the 6% organic growth achieved by the company.
• On the back of higher operating expenses mainly due to salaries and USD 263 million of expense related to the increase in fair value of redeemable preferred securities incurred in the quarter, the company posted a loss before income tax of USD 126 million, against a profit of USD 115 million in pcp.
• The net loss for the reported period stood at USD 175 million, against net income of USD 83 million in pcp. 

Risks associated with investment

A further breakout of covid-19 might result in cancellation by individual customers of their ongoing software maintenance contracts and the suspension or revocation of new software purchases. The pandemic may also harm many of the customers, including their ability to fulfil ongoing payment obligations to the company, which could increase the company’s bad-debt exposure. Another critical risk involves fluctuation in foreign currency compared to USD.

Valuation Methodology (Illustrative): EV to Sales

Stock recommendation

In Q1 2021, the company posted healthy growth in its topline. With ample liquidity in hand and positive free cash flow available to shareholders of USD 269 million, allowing the company to expand its wing in new territories through acquisitions. Recently, the company entered into a binding agreement for the purchase and sale of FICO’s Collection and Recovery business, and we believe it would open a fresh gateway to future cash flows. Moreover, the company outperformed the industry margin profile on many fronts, which is a key positive. Therefore, based on the above rationale and valuation, we recommend a “Hold” rating at the closing price of CAD 1,742.21 on June 02, 2021. We have considered Intuit Inc, Accenture PLC, Enghouse Systems Ltd. as the peer group for the comparison.

One-Year Technical Price Chart (as on June 02, 2021). Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.