Will Shopify’s share price keep rising after Q3 earnings?

Shopify [SHOP] is forecast to report nearly 50% higher revenues and 13% earnings growth year on year in its third-quarter results on October 28. Rocketing demand for ecommerce as more people shop online has supported the growth spurt of Shopify which is now expected to abate as pre-COVID-19 shopping behaviours begin to return.

“This past year has been one of great uncertainty for independent merchants,” said Tobi Lütke, Shopify’s chief executive while detailing June quarter results. “What used to be two completely distinct industries, the retail industry and the online commerce industry, are now just the commerce industry.”

Shopify is continuing to innovate, for example by teaming up with Microsoft [MSFT] and Oracle [ORCL] to offer enterprise resource planning tools for its merchant customers to save them time and money.

Over the past 12 months, its share price has climbed 26%, compared with a 42% drop at peer BigCommerce [BIGC].

 

 

Growth expected to slow down

According to Zacks analysts, Shopify is expected to post third-quarter earnings of $1.28 per share and revenues are expected to be $1.15bn, a slower growth than in 2020. The company had anticipated this in the previous quarterly results, because brick and mortar stores have reopened.

Analysts remain bullish, because of an array of new moves by Shopify, such as partnering with video social network TikTok to offer customers a shopping tab on their accounts and ‘buy now pay later’ group Affirm Holdings [AFRM] to speed up purchases.

According to Market Screener, a consensus of 43 analysts has an ‘outperform’ rating on the stock and a target price of $1,712. Robert W Baird has a ‘buy’ rating and a price target of $1,650.

“The tech firm boasts an impressive balance sheet with $7.8bn in cash, equivalents and marketable securities against $1.83bn in total liabilities. Its strong financial footing will help it continue to grow while pursuing new areas and even possibly support an acquisition,” says Benjamin Rains, stock strategist at Zacks. “It also has plenty of room left to run within the booming ecommerce sector, since it’s far from a peak.”

“The tech firm's...strong financial footing will help it continue to grow while pursuing new areas and even possibly support an acquisition" - Zacks' stock strategist Benjamin Rains

 

 

Track record of success

In the second quarter, Shopify reported record revenues of $1.12bn, up 57% on the same period last year and beating forecasts of $1.05bn.

Its subscription products rose 70% to $334.2m and its merchant solutions revenue was $785.2m, up 52%.

Earnings came in at $2.24 per diluted share, up from $1.05 and far ahead of the $0.97 forecast.

Shopify said new application programming interfaces (APIs) helped customers with cart functionality, selling plans, international pricing and local pickup.

 

In addition, it rolled out Shop Pay Installments, powered by Affirm, to all merchants in the US, enabling them to provide buyers with “increased flexibility and affordability at checkout”.

But Shopify only added 85,000 net merchants in Q2, less than the 145,000 added in the first quarter.

Amy Shapero, Shopify’s chief financial officer said, “ We built on our momentum, making significant updates to our platform infrastructure, expanding strategic partnerships and advancing our portfolio of growth initiatives to future-proof the success of tomorrow’s entrepreneurs.”

 

Triggers for the Shopify stock price

Analysts will be keen to hear of any upcoming partnerships with services such as TikTok as the group looks at new areas of growth and diversification.

Management’s comments about how they see consumer trends as the pandemic fades will also be interesting. They may provide views on how they see festive demand this year and if the current global supply chain squeezes are causing any headaches for it or its merchants.

Shopify is adjusting to a return to normal after the boom in business during the pandemic. Progress might be slower, but shopping is going in one direction, and that is digital.

According to The Motley Fool, Shopify believes it has an addressable market of $153bn. Shopify’s share price looks set to continue ringing.