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3 Things to Watch When Shopify Reports Earnings

By Danny Vena – Oct 24, 2019 at 9:00AM

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Can the e-commerce provider justify its massive stock gains already this year, or is it set for a fall?

Shopify (SHOP 0.67%) has been one of the standout performers so far in 2019, with its stock gaining more than 120% year to date. The company produced better-than-expected results in each of the previous two quarters, driving shares to all-time highs earlier this year. At one point, the stock had tripled, but a secondary offering in September and a general sell-off in the software-as-a-service space combined to take some of the wind out of the highflier's sails.

Investors will be watching closely when Shopify releases its third-quarter financial results before the market open on Tuesday, Oct. 29. Let's take a look at several areas that will be of keen interest to shareholders when Shopify reports earnings.

A reception desk with an illuminated Shopify logo.

Image source: Shopify.

Slowing revenue growth

One of the areas of interest for investors is Shopify's revenue growth, as it was inevitable that its breakneck pace would eventually slow. In the second quarter, revenue growth decelerated to 48% year over year -- still enviable by any measure -- but down from 62% in the prior-year period.

Investors will be watching to see that Shopify's growth doesn't slow too quickly. For the third quarter, the company has forecast revenue in a range of $377 million to $382 million, which would represent growth between 40% and 41%. Wall Street clearly believes Shopify can do better, with analysts' consensus estimate parked at $384.51 million, above the high end of management's forecast. 

Elusive profitability

For all its revenue growth, Shopify has yet to produce a profit, something investors will eventually want to see. For the second quarter, the company reported a GAAP net loss of $28.7 million, even wider than the $24 million it lost in the prior-year period. This resulted in a loss per share of $0.26. 

What's causing the mounting losses? Shopify is squarely in investment mode as it works to expand its growing empire. In recent quarters, the company has improved Shopify Plus -- its platform that caters to enterprise-level businesses -- and increased its native language capabilities, offering its services in 11 new languages, bringing the total to 18. In addition, Shopify is increasing the number of tools it provides to help merchants succeed and expanding the capabilities of its point-of-sale software. The company is also moving into fulfillment (more on that below).

These initiatives come at a cost as Shopify continues to invest heavily in its growth. At some point, investors will want to see real profits, and will eventually grow impatient.

Growing fulfillment ambitions

Over the past several months, Shopify has made some moves that illustrate the company's growing interest in fulfillment.

At its Shopify Unite conference in June, the company debuted the Shopify Fulfillment Network, in a clear nod to e-commerce leader Shopify said the service would be available to qualifying merchants in the U.S. and would consist of a network of dedicated fulfillment centers. The system would also use artificial intelligence to determine the optimal inventory level at each warehouse, as well as to more efficiently route orders from each fulfillment center by calculating the distance to each delivery location. 

An even more important announcement came last month when Shopify acquired privately held 6 River Systems, a leading provider of collaborative warehouse fulfillment solutions, in a deal valued at $450 million. The company provides "flexible and scalable warehouse automation powered by collaborative robots and artificial intelligence." 

Taken together, these two recent developments establish a clear pattern, showing that Shopify is making a strategic move into Amazon's logistics and delivery arena. Investors should watch for any updates regarding the company's ambitious fulfillment plans.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Danny Vena owns shares of Amazon and Shopify. The Motley Fool owns shares of and recommends Amazon and Shopify. The Motley Fool has a disclosure policy.

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