There's some healthy momentum in Shopify (NYSE:SHOP) as we head into this week's critical financial update. Shares of the e-commerce platform provider have soared 27% so far this young year -- moving higher in seven of the past eight trading days -- and that translates into high expectations for Tuesday morning's fourth-quarter report.
Everything seems to be going Shopify's way lately. The continuing migration of commerce online, Shopify emerging as the platform of choice for what is now more than 600,000 budding or established businesses, and even the recent legalization of recreational marijuana in Canada are lighting a fire under the stock's fundamentals. The stock hit yet another all-time high on Friday. It's time to see if Shopify can live up to the hype.
Earning your keep
Wall Street's holding out for another period of strong yet decelerating top-line growth. Analysts are projecting $327.6 million in revenue for the seasonally potent fourth quarter, a move that will push trailing results north of $1 billion for the first time. We're looking at a 47% surge over the prior year, scintillating growth but still Shopify's 12th consecutive quarter of sluggish top-line growth.
Slowing growth over the past three years hasn't been a deal breaker for Shopify or its investors. The stock has soared 64%, 139%, and 37% in each of its first three full years as a public company, and it's off to another strong start in 2019.
Shopify generates money through subscriptions -- where a basic plan starts at $29 a month -- as well as merchant services, which cover a piece of completed transactions as well as optional fulfillment, financing, and other services. Merchant services revenue has been growing faster than that of subscriptions in recent quarters, and now accounts for more than half of its revenue. It should be more of the same in Tuesday's report, especially during the transaction-heavy holiday-containing fourth quarter.
This is Shopify's most profitable quarter given the seasonal tailwind. Analysts are targeting $0.20 a share in earnings for the quarter, up from the record $0.15 a share it rang up a year earlier. Shopify has obliterated analyst expectations with ease over the past year, and it will probably have to do so again if it wants to justify the all-time highs the stock is currently fetching.
Things have been quiet on the news front in terms of analyst updates. It's been more than a month since KeyBanc analyst Brent Bracelin tapped Shopify as one of the best software stocks to own in 2019. Obviously the stock's strong gains heading into Tuesday morning's report raise the bar on expectations. The holidays will naturally perk up sales, but the mid-October move in Canada to legalize cannabis make this a potentially even stronger three-month chunk of Shopify's business. Ontario's official government site as well as a couple of other Canadian provinces have Shopify powering their online stores. There are naturally several other private-party retailers giving it a go on the platform. Shopify had over 1 million visitors and more than 100,000 orders in just the first 24 hours of legalization.
Check out the latest Shopify earnings call transcript.
This could and should be a really strong quarter, and the way the stock's been behaving, one has to wonder if top-line gains will finally break the nearly three-year trend of deceleration. Revenue rose 58% last time out. The obvious counter to the cheerleading is that the stock has been on fire in recent weeks, discounting a strong report. The already-volatile stock will be on the move on Tuesday and probably all week.