Shopify (NYSE:SHOP) recently released its third-quarter earnings report, and the metric that grabbed the most attention was the bottom line. The company recorded a GAAP net loss of more than $72 million for the quarter, along with a loss per share rate of $0.64, a significant decline from its year-ago net loss of $23 million and loss per share of $0.22.
This may be mostly why its shares sunk after the earnings release.
Despite its worsening bottom line, however, Shopify remains a compelling prospect and here's why.
Shopify's impressive revenue
One of the main factors behind Shopify's meteoric rise in recent years has been the company's strong top-line growth backed by the increasing popularity of its platform. In that respect, Shopify is showing no signs of slowing down. It now boasts over 1 million merchants on its platform, and its gross merchandise volume (GMV) -- the total value of sales generated on its platform -- is rising rapidly as well. GMV for the quarter was $14.8 billion, a 48% year-over-year increase, and total revenue climbed by 45%.
Furthermore, both of Shopify's main business segments -- subscription solutions and merchant solutions -- showed strong momentum during the quarter. Subscription solutions grew by 37% year over year, and merchant solutions jumped by 50% compared to year-ago levels. Detractors may still point to the company's bottom line as a potential problem moving forward, but Shopify's net loss worsened in part because the company is investing in initiatives that could boost its competitive advantage.
Several avenues for growth
Shopify is pursuing multiple paths for growth, though some are more promising than others. In particular, the tech company has been spending a small fortune to establish its fulfillment center, which is intended to enable sellers on its platform to deliver products to customers more efficiently. It recently acquired 6 River Systems -- a provider of warehouse fulfillment solutions -- for $450 million, the biggest purchase in Shopify's history; Shopify funded this acquisition with a mix of cash and stock. The company has acknowledged that the acquisition would increase its expenses by about $25 million for the current fiscal year, including $10 million in operating expenses, $8 million in stock-based compensation, and $7 million in amortization expenses.
Nevertheless, this move could pay off down the road. Shopify is already one of the leading platforms for merchants looking to create an e-commerce store from scratch. Once the fulfillment network is fully operational, the company will likely become even more attractive to small and medium-sized business owners.
Shopify's international expansion also seems to be working. The company has been making waves in countries outside North America, including France and Germany (where Shopify kicked off brand campaigns during the third quarter), as well as Japan. As CFO Harley Finkelstein remarked during the third-quarter earnings conference call, "Our international expansion efforts continue to pay off as merchants from outside our core geographies were once again the largest component of new adds. GMV from these international merchants outpaced GMV growth overall."
Lastly, Shopify announced that its platform would now be open to the sale of hemp-based cannabidiol (CBD) products in most U.S. states. Note that the company has agreements in place with several Canadian provinces to provide its e-commerce platform for the purpose of cannabis sales within their respective territories. Considering the projected growth of the marijuana industry, Shopify could benefit immensely from this move. However, the move comes with a major caveat: Cannabis companies have been beaten to a pulp recently, and though sales estimates for the sector remain sky-high, it isn't clear how much this will have a material impact on Shopify's earnings in the future.
Why Shopify might still be a buy
It isn't surprising that many investors are reacting negatively to Shopify's widening losses. After all, the company will have to become consistently profitable at some point, and it isn't clear whether it has a path there yet. However, revenue is growing quickly, and through various initiatives, it's trying to keep its competitive advantage intact. For these reasons, Shopify still looks attractive, and the recent sell-off (Shopify's shares are down about 8% since its earnings release) presents a buying opportunity for interested investors.