When it comes to e-commerce, most investors think of Amazon by default. However, there are a number of niche players, like Etsy and Pinterest, that have proven to be formidable players as well.
One company that has taken on Amazon directly is Shopify (SHOP 1.11%). Last year, Shopify acquired shipping and logistics start-up Deliverr. While the ambition garnered applause from Wall Street and retail investors, the execution was a different story. Earlier this year, Shopify divested Deliverr after realizing that taking on Amazon's logistics network might not be feasible.
Following these events, some investors questioned Shopify's vision and its brand identity. Nevertheless, the company doubled down on the areas that are working: subscription services and merchant solutions. After reporting third-quarter earnings, it's become increasingly clear that Shopify is at its best operating an e-commerce ecosystem, without the headaches of the logistics network. With the stock down over 60% from its all-time high, now is the time to take advantage and buy the dip.
A quick turnaround
While mergers and acquisitions are alluring, these transactions can become major headaches if they don't work out. Following the abandonment of Deliverr, some investors were naturally disappointed and questioning the management team.
However, Shopify's latest earnings report contained some impressive results and showcased just how quickly management has gotten the ship back on track. For the third quarter, Shopify grew total revenue 25% year over year to $1.7 billion. The company also demonstrated disciplined cost measures, underscored by a 23% reduction in operating expenses. The combination of rising revenue and lower costs generated strong profit margins. By contrast, Shopify reported a net loss during the year-ago period.
Management credited the increase to the top line to pricing changes and higher gross merchandise volume (GMV). In fact, Q3 GMV of $56.2 billion grew 22% year over year -- the highest quarterly growth since the more pronounced volumes of 2021, which were heavily influenced by the pandemic. GMV growth is reaccelerating, thanks in large part to the company's growing suite of services. One of the main highlights from the latest quarter was Shopify Payments, which increased its share of GMV four percentage points to 58%.
As more merchants continue to choose Shopify, the company has an incredible opportunity to penetrate all aspects of commerce for its end users by cross-selling additional services. In turn, this should help increase revenue, expand margins, and lead to robust cash flow generation. In fact, the company is already demonstrating its ability to do this, and investors may be missing this progress in the shadow of its failed logistics network.
Image source: Getty Images.
The cash machine is printing
For a long time, I viewed Shopify as an e-commerce platform that mostly caters to small and midsize enterprises (SME). But Shopify's Q3 investor presentation illustrates the growing reach of its solutions.
For example, YouTube's biggest star is social media influencer Mr. Beast, whose online merchandise store is powered by Shopify. Socially responsible apparel and fashion brand Toms is a Shopify customer, as is the Sacramento Kings franchise of the National Basketball Association.
By signing on larger customers, Shopify has been able to command a higher price point for its services. While the obvious benefit of enterprise pricing is an increase to revenue, the company has done a stellar job onboarding additional merchants while keeping them satisfied on the platform. This dynamic has propelled Shopify's cash flow profile.
Shopify reported $276 million in free cash flow last quarter. This is higher than the prior six quarters combined and a massive swing from the negative free cash flow of $148 million a year ago.
Data by YCharts.
To me, this is the biggest highlight of the third quarter. Many investors and Wall Street analysts are placing too much weight on Shopify's ability to generate consistent top-line growth in a market dominated by Amazon. However, in the face of a complicated divestiture, Shopify has regrouped and become a more robust business supported by growing sums of cash. With nearly $5 billion of cash and marketable securities on its balance sheet, Shopify is well-positioned to expand its ecosystem and dominate its own corner of the evolving e-commerce space.
Should you invest in Shopify stock?
Investors should keep in mind that Shopify is a growth stock, and it very much trades like one with high levels of volatility. As a result, it can be hard to know if you're buying into a steep rally or sell-off. But in a situation like this, think big picture.
For starters, the company is quickly putting its botched logistics investments in the rearview mirror, and the core business is humming along with strong growth across its platform. Second, Shopify is once again generating free cash flow and growing this metric. Third, GMV growth is now accelerating at levels not seen since the pandemic, yet the stock is trading at a heavy discount to where it was just a couple of years ago.
With that context, dollar-cost averaging at these levels looks appealing, and the 65% discount to its previous high could prove to be a major bargain.
