Shopify's [SHOP] share price is up a huge 144% this year as it continues to position itself as a credible alternative to Amazon for small businesses.
Q1 saw Shopify deliver $320.5 million worth of revenue, up 49.5% from the same period the previous year. This crushed both management and analyst expectations. Earnings per share came in at $0.09, up a massive 125% year-on-year. Subscription revenues, which account for almost half of all revenue, were up 40.2% to $140.5 million.
Since the Q1 results came out, Shopify’s share price has looked invincible, climbing 30% in that time. Yet going into Thursday’s Q2 results, there are questions about whether the stock is worth its sky-high valuation.
What to expect for Q2?
Investors are expecting earnings per share to come in at $0.03, which would represent a 50% year-on-year growth. For revenue, Zacks Consensus Estimate has net revenue pegged at $351.58 million, up 48% from the same time last year.
Estimated net revenue - a 48% increase from last year
Yet, it might not all be good news. Expectations are that the company will report a $35 million loss, according to analyst estimates compiled by Bloomberg. Losses are nothing new for tech companies, but investors might get fidgety considering the company’s high market cap.
If Shopify's share price is going to continue to soar, the margin by which the company beat analysts’ consensus expectations will be crucial. According to Zacks, last quarter Shopify delivered a 280% surprise on analyst earnings expectations, while the quarter before that saw a 23.81% surprise.
What's driving growth?
Faster shipping for merchants
Shopify announced the launch of its new US shopper fulfilment centres last week. These centres will give third-party retailers a better chance of competing with Amazon by offering merchants of all shapes and sizes same-day delivery.
Such a move could help Shopify balance its business model. Currently, the company’s revenues are reliant on a minority of larger merchants that use its premium services. By providing faster shipping to smaller merchants, it could increase business from these sellers and pry other small business away from Amazon.
Investors welcomed the news last week with the share price jumping 7% post announcement. Any indication in the Q2 release that Shopify is increasing revenue from small businesses is likely to particularly please investors.
In an effort to win international business, Shopify has been increasing the number of languages on its platform. Currently, the platform is available in Brazilian Portuguese, Japanese, German, Spanish, French, and Italian. There has also been work done to offer the platform in simplified Chinese.
Bolstering the international offering is the ability for those using Shopify Payments to make and receive payments in multiple currencies. Word on how Shopify is growing beyond its North American audience could justify the hefty valuation the stock carries.
Is Shopify a ‘Buy’?
Shopify has a huge forward P/E ratio of 350, a significant premium relative to the 28.43 sector average. Yet analysts at Barrons have argued that Shopify could grow into its lofty valuation, much like Amazon did; the launch of its fulfilment centres very much a step in the right direction.
|1 year target est.||$320.84|
|Quarterly Revenue Growth (YoY)||49.50%|
Shopify share price vitals, Yahoo Finance, 29 July 2019
On the technical analysis front, analyst Justin Kuepper writes on Investopedia that Shopify retested its 52-week high mid-July and the stocks MACD is moving to a 'near-term bullish' crossover. This could mean a breakout is on the cards should the stock break through its 52-week high. Kuepper suggests a break below the 50-day moving average could see the stock drop to $280 or $260, although he thinks this is unlikely.
Of the 29 analysts tracking the stock on Yahoo Finance, 18 rate the stock either a "Strong Buy" or a "Buy", with 10 maintaining a “Hold” rating and one “Sell”. Yet an average price target at $320.84 would represent a 2% downside on the current price.
Investors will have to weigh up whether a solid earnings result will see the stock climb higher, against this idea that any upside is limited due to an already imposing valuation.