Slowing Growth Hits Shopify, but the Long-Term Story Remains Intact

Shopify (SHOP +2.24%) had a lot to prove going into its most recent earnings release. While the company continued to increase revenue and add merchants at a torrid pace, a noted short-seller had the company back in its crosshairs, claiming that the recent data scandal at Facebook would make it harder to recruit new merchants. Investors were also questioning whether the company could continue at the breakneck speed it had established over the last several years.

After last quarter's solid performance, Shopify's envious growth continued, but its momentum cooled slightly compared to recent reports, and the stock initially slumped.

Investors seemed concerned about Shopify's slowing growth. Image source: Shopify.

The numbers tell the tale

Data source: Shopify Q1 2018 financial release. Table by author.

For the first quarter, Shopify produced revenue of $214 million, which blew past the high end of the company's forecast between $198 million and $202 million. Sales also exceeded analyst consensus estimates for $202.2 million. Unfortunately, this was the slowest rate of growth the company has seen since going public in mid-2015.

Shopify's adjusted operating loss of $0.2 million for the quarter improved from the year-ago quarter. It was also better than the company's forecast for an adjusted loss between $6 million and $8 million. This produced adjusted earnings per share of $0.04, a year-over-year improvement and just shy of the Wall Street consensus.

Broad-based results

Shopify produced impressive results across its business. Subscription solutions grew to $100.2 million, up 61% year over year, while merchant solutions, which includes payments and shipping, grew to $114 million, soaring 75% over the prior-year quarter. Monthly recurring revenue (MRR) for the quarter hit $32.5 million, up 57% compared to the year-ago quarter, and growing to 15% of the company's total revenue. The ability to increase this stream of stable, repeatable sales bodes well for Shopify's future.

Shopify Plus, the company's enterprise segment, accounted for $7 million, or 22% of total MRR, up from 17% in the prior-year quarter. Prompted by the growth of merchants on its platform, Shopify added the enterprise segment for those growing merchants, but it now provides another massive growth opportunity serving larger businesses.

Gross merchandise volume was also solid, at $8 billion, up 64% compared to the same period last year, while gross payments volume of $3 billion grew 38% year over year.

Shopify Capital, the company's lending arm, provided merchants with $60.4 million in cash advances during the quarter, more than three times the rate from the prior-year quarter. The company has now made loans of over $230 million over the prior two years, with $63.5 million outstanding at the end of the quarter.

Were expectations too high? Image source: Getty Images.

A bit of an overreaction

For the second quarter, Shopify expects revenue in a range of $230 million and $235 million, which would represent year-over-year growth of between 52% and 55%. The company also forecast an adjusted operating loss in a range of $5 million to $7 million, worse than the $3.6 million loss analysts were predicting for the quarter. 

As a high-growth company with an equally high valuation, Shopify is more prone to volatility than larger, more established businesses with more reasonable price tags. Investors generally consider a price-to-sales ratio of between 1 and 2 to be good, and under 1 to be excellent. Shopify's ratio of 19 just before earnings shows the market's high expectations of the company. Any real or perceived weakness in its results, however slight, will likely be met with a similar sell-off.

Shopify is still producing enviable growth, and while it was a bit slower than some would have liked, this was clearly overreaction from investors and a good example of a buying opportunity for those with a longer time horizon.