Shopify
has posted an earnings beat for the fourth quarter and guided for growth in 2024, but the shares still fell on Tuesday. It’s about the valuation—and fears that the company is ramping up spending again.
The company, which offers services and tools for online selling, reported earnings under generally accepted accounting principles, or GAAP, of 51 cents a share for the fourth-quarter. Adjusted, or non-GAAP, earnings were 34 cents a share. The company beat on both metrics—analysts expected unadjusted earnings to be 22 cents and adjusted earnings to clock in at 30 cents a share, according to FactSet.
Revenue was $2.14 billion, ahead of forecasts for $2.08 billion, according to FactSet consensus estimates.
Gross merchandise volume, or the total value of orders processed on
Shopify’s
platform came to $75.1 billion, up 23% from the same period a year earlier and ahead of calls for $72.5 billion.
“Shopify did exactly what you want to see during a record Q4 holiday shopping season, blowing away Q4 targets,” said Charlie Miner, analyst at research firm Third Bridge.
Shopify said that for its first quarter it expects revenue to grow at a low-twenties percentage rate—in line, or slightly above, consensus estimates. Gross margins is predicted to increase approximately 1.5 percentage points quarter-over-quarter, and free cash flow as a percentage of revenue should be in the high-single digits, improving in each quarter.
While Shopify didn’t provide guidance for the rest of the fiscal year, Harley Finkelstein, Shopify’s president, said he expected consumer demand to remain healthy.
“The consumer seems incredibly resilient,” he said on a call with Barron’s Tuesday.
Despite the solid report, Shopify’s U.S.-listed shares were down 10% on Tuesday morning. Investor pushback likely stems from the fact that the company’s valuation was high heading into the report, with the stock having risen 60% over the last 12 months. The shares trade hands at 81 times forward earnings. For comparison,
Amazon
commands a price to earnings valuation of 40.3.
As JMP’s Andrew Boone remarked in his December downgrade of the stock, the company’s execution “must be perfect” to justify its valuation. And while Tuesday’s report was good, it wasn’t perfect. For one, while the company’s decision to sell its logistics network last year will have a positive impact on margins, it will drag on revenue growth.
Shopify’s free cash flow guidance also disappointed.
“Investors were likely not expecting such a significant decrease in FCF margin from the fourth quarter to the first quarter (21% to high single digits),” wrote Matthew Pfau, analyst at William Blair.
The main driver for the lower-than-expected guidance is that the company’s operating expenses are going to be higher in the first quarter compared with the fourth quarter as it spends more on performance marketing and scaling its point-of-sale offerings for physical retailers. That could weigh on margins, analysts say.
The company’s announcement also harked back to Shopify’s spending spree in 2020 and 2021, which resulted in profitability challenges, two rounds of layoffs which affected about 30% of its staff, and the decision to sell off its logistics business. Shopify has since focused on being “operationally disciplined,” Finkelstein said, which has put it on better footing heading into 2024—but the market may be fearing a future course correction from the company.
Finkelstein acknowledged the concerns, but stressed that the spending was targeted and tightly managed.
“We are seeing that there are payback periods and opportunities for us to spend where we get a very strong return,” he said.
Pfau, who has an Outperform rating on the stock, notes that the increased investment isn’t headcount driven, so if Shopify doesn’t see the returns it expects, management could quickly make changes. Plus, the company has come in ahead of its free cash flow guidance over the past several quarters, he added.
Wall Street had been tweaking its estimates higher heading into Tuesday morning’s report, fueled by optimism over the company’s latest reset plan. Over the past year, Shopify has focused on growing its offerings for merchants, such as rolling out a new artificial intelligence assistant and improving its services for brick and mortar retailers as it looks to sign on bigger companies to its so-called “enterprise” business.
Those efforts have started to pay off. Revenue increased across al its verticals, including merchant solutions and subscription solutions, which were up 21% and 31% year-over-year, respectively. The higher number of merchants signing up for the company’s platform helped drive growth, Shopify said, as well as plan pricing increases. This quarter, brands like
On Holding,
Oscar de la Renta, and Everlane joined the platform, Finkelstein said, and the company is working to draw more in.
“That’s an area where we still have not won yet, and we have a potential to really win,” Finkelstein said.
Still, analysts are cautious on the stock. Per FactSet, 54% rated it a Hold ahead of earnings, 40% a Buy, and 6% a Sell.
Corrections & Amplifications: Shopify offered guidance for the first quarter of 2024. An earlier version of this article incorrectly said it was for the full year.
Write to Sabrina Escobar at [email protected]
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