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Will Shopify beat the street yet again? Ottawa’s e-commerce giant has produced better-than-expected financial results for 16 consecutive quarters, ever since it first issued shares to the public in the spring of 2015.
Independent analysts are betting Shopify will make it 17 in a row on Tuesday, when it will publish results for its third quarter ended September 30.
Analysts tracked by Thomson Reuters expect Shopify will report revenues of nearly $384 million, along with an operating loss of close to $45 million (all figures U.S.). Shopify’s chief financial officer Amy Shapero said three months ago the company expected its third-quarter revenues to be in the range of $377 million to $382 million, with an operating loss of $44 million to $47 million.
So, we’re not looking for a blowout performance on Tuesday, merely another sparkling quarter in which revenues grew at least 40 per cent year over year.
Yet, there are several reasons for paying close attention to Shopify’s numbers. First, from investors’ point of view, if the company unexpectedly fails to match the expectations set for it, the value of its shares will in all likelihood plunge. That’s because Shopify’s current valuation implies near-perfect performance in the years ahead.
At $317.45 per share Friday on the New York Stock Exchange (C$414.58 on the TSX), the company’s market value was more than $36 billion (C$47.8 billion) — nearly 18 times Shopify’s anticipated revenues next year. This was despite a 22-per-cent drop from the peak share price last August. Normally a ratio of 10 times annual revenue is considered expensive but analysts have been justifying their price targets for Shopify ($362 consensus) on a ratio of 15 times revenues (forward from Q3 2020) because of the Ottawa firm’s superb track record and leading position in its industry.
“In our opinion there are only a handful of companies on the planet that could rival Shopify’s competitive positioning and growth,” concluded Gus Papageorgiou, head of research for PI Financial, and an analyst with 25 years’ experience covering technology stocks. “The long-term growth for this company is highly compelling,” he added in his Oct. 24 note.
Papageorgiou offered clients two sets of projections for Shopify. The first predicts third-quarter revenues of $382 million — his “base case”. The second, his “upside case”, forecasts quarterly revenues of $400 million. The latter assumes that Shopify has been generating more fees from its e-commerce services and apps than it has been letting on.
Indeed, the key to understanding both the steadiness of Shopify’s progress and its long-term potential is the nature of its business and how it has tackled it.
Essentially, Shopify has made a giant bet on entrepreneurs. The company generates more than 40 per cent of its revenues by selling subscriptions to its dashboard technology — which allows entrepreneurs to quickly set up online shops and track how well they’re doing. Subscription revenue, because it is recurring, is relatively predictable.
The rest of Shopify’s revenue comes from fees it collects for the use of its apps, ranging from online checkout technology to shipping. This part of the business reflects how well entrepreneurs are doing.
Earlier this year Shopify revealed it will spend $1 billion over the next five years to build a network of fulfillment centres that would allow it to ship its subscribers’ products more quickly. As proof of its serious intention, Shopify last month it shelled out $450 million in cash and shares for 6 River Systems, a Boston specialist in fulfillment technologies.
The more successful are Shopify’s subscribers — it now has an estimated one million of them — the greater its stream of revenues.
Shopify nevertheless is still vulnerable to a potential downturn in the overall economy because many online shops would see lower sales, thus producing fewer fees for Shopify. The company of course can mitigate the economic risk somewhat by adding new subscribers in what remains the early stages of a seismic shift from bricks-and-mortar to e-commerce retailing.
Just how this will all play out, and whether Shopify will retain its early lead, is a matter of great conjecture — which helps to account for the great swings this year in its share price.
It’s part of their reward for creating and running one of the most efficient revenue generators this city has ever seen.
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