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Shopify Is Still Setting E-Commerce Shopping On Fire

By Rich Duprey – Nov 3, 2021 at 6:50AM

Key Points

  • Despite missing analyst top and bottom line projections, revenue is still rising sharply.
  • Merchant gross merchandise value is beginning to grow at exponential rates.
  • Shopify is offering new opportunities to ensure future profitable growth.

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The market was not fooled by the double-digit growth missing Wall Street's estimates.

If Shopify's (SHOP -1.30%) third-quarter results show anything, it's that retail's transition to an online model is accelerating and the cloud-based e-commerce platform is leading them forward.

President Harley Finkelstein said it took its merchants 15 years to achieve $200 billion in cumulative gross merchandise value (GMV), but just 16 months to double that to $400 billion. "As the share of GMV from offline expanded within our total GMV," Finkelstein said, "it is clear that entrepreneurs are embracing a future in which retail happens everywhere." 

Person counting money at register.

Image source: Getty Images.

Shopify's rate of growth is slowing compared to the white-hot pace it set last year during the pandemic and non-GAAP profits came in well below Wall Street's expectations. However, investors seem to be focusing on the fact that expansion is resuming a more normalized and sustainable growth trajectory for the long term.

Still generating supercharged growth

Shopify said revenue grew 46% in the third quarter to $1.1 billion on a 51% gain in merchant solutions, which reached $787.5 million, while subscription solutions rose 37% to $336.2 million. GMV was also $42 billion for the period, up 35% from last year. But GMV was below analyst projections of $43.4 billion, and appears to show a slowdown from the 40% growth achieved in the second quarter and well under the 114% increase seen in the first. 

Still, despite the share of the e-commerce segment of the overall retail market resetting itself to a point below last year's peak, Shopify's e-commerce retail business was above the level it was at two years ago. That indicates that the one-off effect of the pandemic hasn't disrupted Shopify's underlying hyper-growth trajectory. It is also part of the "retail happens everywhere" ethos Finkelstein cited, which is even built into its press releases. Finkelstein highlights that they are not released from the city where its corporate headquarters are located, as is typical for companies. Rather the growth tech stock's releases are issued from "Internet, Everywhere."

Two people with credit card, looking at laptop.

Image source: Getty Images.

New markets to tackle

Shopify continues to follow what's hot. During the third quarter, it introduced the new Shopify Markets, to enhance cross-border commerce. There's also a no-fee money management platform called Shopify Balance and TikTok Shopping, which allows for consumers to organically discover products along shopping tabs linked directly to a merchant's online store. Taking Shopify into new markets apparently boosted investor confidence that it will be able to grow into the future, as they shrugged off the sales and earnings miss and boosted Shopify's stock some 7% higher on the day of the release.

The cloud-based e-commerce platform doesn't provide specific guidance but maintains growth will continue in a more normalized fashion, albeit at a slower pace than was set during 2020. But there's still tremendous opportunity. A study by Shopify estimates livestream shopping events will generate $25 billion by 2023 in the U.S. as Amazon and Facebook test live sales platforms. Click-and-collect commerce will top $64 billion this year alone, while globally around $2 trillion is spent each year on the top 100 marketplaces. Just increasing personalization is expected to unlock an additional $3 trillion over the next decade.

And while management doesn't say by how much, the fourth quarter is still expected to contribute the greatest amount to full-year revenue, though it will be a more even distribution across the year. That's actually good for the long-term health of the company, and with a full-year adjusted operating income forecast to exceed the record level of $437 million achieved last year, it's clear Shopify is on a healthy, profitable footing.

Sitting just below its all-time high, Shopify's stock doesn't necessarily come cheap. It trades for 57 times trailing earnings and over 200 times next year's estimates, but Wall Street forecasts it is going to grow earnings at a compounded rate of almost 30% annually. That means it's trading at less than 2 times the growth rate, a not particularly rich valuation considering its potential. The market seems to correctly realize that just because a company isn't expanding at a pace set in an extraordinary year doesn't mean it's not still growing. That seems to be where Shopify is heading, and why its business remains on fire.

Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Shopify. The Motley Fool recommends the following options: long January 2023 $1,140 calls on Shopify and short January 2023 $1,160 calls on Shopify. The Motley Fool has a disclosure policy.

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