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Will Decelerating Revenue Continue When Shopify Reports Earnings?

By Danny Vena – Updated Apr 10, 2019 at 3:19PM

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The company is guiding for lower-than-expected growth. Will it be enough?

2018 was a wild ride for Shopify (SHOP -1.30%) investors. The stock had been up as much as 72% before settling for a 37% gain to close out the year, blasting past the 6% decline for the S&P 500. Fears concerning the company's slowing growth and the correction late last year slowed the stocks relentless advance. Still, the company has a vast opportunity ahead as the trend toward e-commerce continues to build, and Shopify provides the platform that makes setting up an online presence easy.

Investors will be looking for signs that the company's growth story is still intact when Shopify reports the financial results of its fourth quarter before the market opens on Tuesday, Feb. 12. Let's recap the third-quarter results and look at a couple of considerations that could affect the current results when Shopify reports earnings.

The lobby of Shopify HQ in Ottawa with an illuminated Shopify logo on the front of a desk.

Image source: Shopify.

Still impressive by any measure

For the third quarter, Shopify generated revenue of $270.1 million, up 58% from the prior-year quarter and easily topping both analysts' consensus estimates and the high end of the company's forecast. Profits also exceeded expectations, with adjusted earnings per share of $0.04, well above the $0.02 loss analysts anticipated.

The robust growth was evident in both business segments. Merchant solutions grew to $149.5 million, up 68% year over year, driven by gross merchandise volume (GMV) that soared 55% year over year, and gross payments volume of $4.1 billion, increasing to 41% of GMV, up from 37% in the prior-year quarter. Subscription solutions revenue grew to $120.5 million, up 46% year over year, and adding to the company's growing cache of monthly recurring revenue.

Shopify's bottom line continues to be affected by international expansion, as operating expenses of $181 million grew 61% year over year. It's important that the company continue to invest in its business, as it will set the stage from future growth.

What the quarter may hold

Shopify's better-than-expected results gave the company a shot of optimism sufficient enough to increase its forecast. Shopify is now guiding for revenue in a range of $315 million to $325 million, which, if achieved, would represent year-over-year growth of 43% at the midpoint. It's important to note that this would be a dramatic deceleration from Shopify's recent revenue growth of 68%, 62%, and 58%, for the first, second, and third quarters, respectively. In addition, the company is expecting adjusted operating income of $17 million at the midpoint of its guidance. Shopify doesn't provide earnings-per-share guidance.

Check out the latest Shopify earnings call transcript.

While we don't want to get caught up in Wall Street's short-term thinking, knowing the market sentiment toward a company can help put the stock movements into perspective. Analysts' consensus estimates are calling for revenue of $327.63 million, a 47% year-over-year incresase, and adjusted earnings per share of $0.20, up from $0.15 in the prior-year quarter. These figures show that analysts believe management is being conservative with its guidance.

A couple of important considerations

As longtime shareholders are aware, there are two factors that tend to make Shopify a more volatile stock. First, with a market cap just short of $19 billion, the stock price tends to move much more than those of its megacap colleagues.

In addition, the frothy valuation tends to increase the volatility, exacerbating any price movements both up and down. Shopify sports a price-to-sales ratio of 15 on a trailing-12-month basis and a more modest valuation of 10 looking ahead. While that's to be expected for a fast growing company, it's pricey when compared with market averages.

As more and more small- and medium-sized businesses move online, Shopify provides the tools to help make it happen, so the company has a significant runway. In addition, the majority of Shopify's business is still transacted in North America, giving the company a fertile international opportunity that has yet to pay off.

We'll have a better idea if the company's upward trajectory is still on track when Shopify reports earnings before the market opens on Feb. 12.

Danny Vena owns shares of Shopify. The Motley Fool owns shares of and recommends Shopify. The Motley Fool has a disclosure policy.

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