Beleaguered e-commerce software giant Shopify (SHOP +2.67%) reported big losses again during the third quarter of 2022. Though revenue increased 22% year over year to $1.4 billion, net losses totaled $158 million (compared to net income of $1.1 billion last year).
Shares were up nearly 20% immediately following the report as earnings still beat analysts' expectations. Regardless, mounting losses aren't great given the economic environment right now. Is it time to sell this stock?
NASDAQ: SHOP
Key Data Points
Some nuance to those net losses
Before answering the "to sell or not to sell" question, let's fill in some critical blanks necessary to evaluate the bottom line. Just as in the first two quarters of 2022, Shopify had some large extraneous items outside its own operations driving results.
First, Shopify itself is a stock investor, and it has suffered in the bear market this year too. But some tech stocks bottomed back in June, so for Shopify, that meant its net loss of $158 million was actually helped by a $172 million unrealized gain on its holdings (primarily made up of Affirm and Global-E Online).
This reverses some of the massive declines Shopify has recorded in these two stocks so far this year. With three quarters down in 2022, Shopify's "other income and expense" line item (not part of its core operations and covering those equity investments) now reads as a $2.37 billion loss, compared to a $3.38 billion gain through the first nine months of 2021.
Now the not so good: Backing out some of the rally in the stock market means Shopify's loss from operations was actually $345 million last quarter, pushing its year-to-date operating loss to $634 million. Shopify said margins were hurt as it integrated its acquisition of shipping services company Deliverr in the quarter (Shopify took over Deliverr in July). Merchant solutions like this generally have far lower profit margins than the company's core e-commerce software subscriptions. Merchant solutions gross margin was just 37.2% in the quarter, down from 43.2% in the prior-year period.
With merchant services comprising 72% of total revenue (compared to 70% last year), and with Deliverr weighing on operations, Shopify was always going to have a tough time reaching breakeven in its latest report.
Give "omnichannel Shopify" some room to run
Time to sell, then, right? Perhaps. Shopify is self-admittedly a long-term story, and it remains to be seen just how profitable this story will ultimately be. Plus, its shipping logistics business, Shopify Fulfillment Network -- which Deliverr will help build -- hasn't even really gotten rolling yet. Through the first three quarters of 2022, Shopify's capital expenditures were just $42 million. Over the next few years, that spending is expected to ramp up to the hundreds of millions each quarter as the company constructs distribution centers and loads them up with robotics and other technology.
In other words, we're likely years away from Shopify being a robustly profitable company. If that's not a business you're interested in owning, this post-earnings pop might be time to cut bait and move on.
However, if long-term (potential) empire-building is what you're interested in, Shopify still has a lot going for it. For instance, the fact revenue has increased 20% so far this year is impressive. Other e-commerce companies' sales (including Amazon) growth has come to a screeching halt. Stores are open again, and consumers are getting out of the house and going shopping.
Shopify's catering to small and nimble online stores is only part of the reason for its success. It's actually an omnichannel partner for merchants these days. Physical point-of-sale solutions and services that cater to a brick-and-mortar store as much as to a digital one have helped Shopify stay on the rise as the economy has reopened.
And while management needs to get operating losses (as well as stock-based compensation, which is up to $407 million this year) under control, the company did report cash and short-term investments of $4.94 billion at the end of September. That doesn't include another $2.42 billion in equities (again, mostly Affirm and Global-E). Convertible debt stood at a manageable $913 million.
All told, this wasn't a fantastic earnings report for Shopify, but it was passable if a wildly profitable business isn't what you're looking for right now. If you have the time (no less than a few years) to wait it out, Shopify still offers enough reasons to warrant patience.
