Shopify (SHOP 1.11%) stock has gained nearly 90% year to date. In November alone, the stock has jumped close to 40% after the company reported a solid third-quarter.
The rally this year suggests investors are now more optimistic about Shopify's prospects after a suboptimal 2022. But is the worst finally over for the company?
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Shopify likely hit a bottom in 2022
Like most e-commerce companies, Shopify faced a difficult 2022 plagued by geopolitical tensions, a weak economy, and a steep drop-off in growth across the industry.
Gross merchandise value (GMV), for example, increased just 12% last year after growing 47% the previous year. Consequently, revenue growth also decelerated from 57% in 2021 to 21% in 2022. To make matters worse, profitability tumbled too with operating income swinging from $269 million to a loss of $822 million in the same period.
Fast-forward to this year, and Shopify was already showing signs of a rebound in the second quarter with 17% GMV growth. Similarly, revenue was up 31% year over year, thanks to the higher GMV and hikes to Shopify's subscription pricing.
Still, with just one encouraging earnings report, it was too early to declare the worst was over for the company. Fortunately, Shopify's latest results suggest the recovery has legs.
Shopify delivered a solid third quarter
Third-quarter growth was strong across all fronts. Revenue grew 25% year over year to $1.7 billion thanks to a 22% surge in GMV. Revenue was up even stronger 30% excluding any impacts from the sale of the logistics business.
Profitability also improved across all fronts. Gross profit jumped 36% to $901 million as gross margin rose more than four percentage points to 52.6%. Operating income reversed from a $346 million loss a year ago to a $122 million profit. Free cash flow also improved from negative $148 million last year to positive $276 million last quarter.
Moreover, the company is guiding for this momentum to continue in the fourth quarter with revenue growing in the low to mid-20s (excluding the logistics business), a single-digit sequential decline in operating expenses, and a high-teens free-cash-flow margin.
In short, Shopify is showing its true potential now that the logistics business is no longer weighing on the company.
What does it mean for investors?
The continued improvements on display in recent earnings reports suggest Shopify's recovery is likely here to stay. Besides, the company is tapping into investments in key areas, including global expansion, artificial intelligence, and omnichannel initiatives to fuel its future growth.
For instance, Shopify launched its Retail Plan -- a new offering for brick-and-mortar merchants that also want a "simple online presence" -- as part of its omnichannel strategy. Since its August launch, this plan has contributed to 16% of Shopify's Retail Pro location growth. And as part of its going global strategy, Shopify expanded its end-to-end cross-border solution (Shopify Market Pro) to all merchants in the U.S. in the third quarter.
The idea here is that so long as Shopify can continue to provide merchants with better and more comprehensive tools, it's well-positioned to attract, retain, and grow with its users. And as merchants become successful over time, Shopify will naturally increase its revenue and profits.
To keep track of Shopify's recovery progress, investors should focus on GMV, revenue, the attach rate (revenue divided by GMV), and profitability too. If the company can sustain its momentum, the worst is indeed over, and investors can count on Shopify to regain its status as a leading high-growth e-commerce company.
