Apr 29 2021 - Shopify: More Sustainable Growth Ahead

Summary

• Shopify posted strong top and bottom line results for 1Q 2021, with revenue coming in at 8.6M, an increase of 110% YoY.
• Gross merchandise volume sales accelerated 114% to B in 1Q 2021, meaning every Shopify makes, its merchants make .
• Shopify can believably transit from a pandemic story to a global recovery story, due to its sticky user base and a strong focus on small businesses.
• Coupled with the strong eCommerce trend, I believe Shopify will have a lot more growth ahead.

Shopify (SHOP) yet again crushed earnings and dispelled any concern around pandemic eCommerce tailwind fading away as the economy reopens. At least it does not seem to be the case for Shopify. Pretty much all metrics experienced accelerated growth, and its user base is getting stickier as shown by the 62% YoY growth of monthly recurring revenue. Shopify is looking to further capitalize on the positive long-term growth of the eCommerce trend. The stock is not cheap by any means, but what else can you expect from a high quality, hyper-growth, profitable, dominating eCommerce SaaS provider, who also happens to be the 2nd largest eCommerce company in the world, only behind the eCommerce giant Amazon (NASDAQ:AMZN).

A closer look at Q1 2021 earnings

Total revenue in the 1Q 2021 was 8.6 million, with growth accelerating to 110% year over year. It is pretty ridiculous considering it is slightly higher than 4Q 2020 revenue which was 7.7 million, and that was the holiday season including both Christmas and New Year. Not to mention that the economy began to reopen in 1Q 2021 as the vaccines rolled out, which have benefited physical retail stores and might have hurt some eCommerce platforms, says eBay (NASDAQ:EBAY).

Gross merchandise volume (GMV) for the first quarter came in at .3 billion, an increase of .9 billion, with growth accelerating to 114% over the first quarter of 2020. This means that Shopify now has a GMV/revenue ratio of 40, so for every Shopify makes, its merchants make which is quite impressive. To put this into perspective, Amazon has a third-party GMV/revenue ratio of 0.77. Of course, it is a different business model for Amazon, but this goes to show that Shopify’s singular goal is indeed to help its merchants succeed, which has been the core company value of SHOP.

This resonates with its merchants, as subscription solutions revenue was 0.7 million, with growth accelerating to 71% year over year as more merchants joined the platforms. In addition, Monthly Recurring Revenue (MRR) as of March 31, 2021, was .9 million with growth accelerated to 62% year-over-year with MRR up from .4 million as of March 31, 2020, as more merchants joined the platform and they stuck around. Not only do they stick around, but more and more merchants also referred other merchants to join SHOP, as the referral number was up 73% YoY as well. SHOP now has more than 1.7 million merchants, and its user base continues to expand. At the end of Q1 2021, SHOP had more than 107 million registered users, including buyers using Shop Pay as well as the Shop App, of which more than 24 million were Monthly Active Users. These kinds of numbers are only behind those of the eCommerce giant Amazon, and in its own racetrack, which is a one stop SHOP eCommerce provider, it has no real competition as of now or in the near future.

Shopify will likely beat the current revenue estimate of .1B for FY 2021

With 1Q 2021 revenue of nearly billion, it is almost a guarantee that SHOP will beat the current FY 2021 revenue estimate of .1 billion. Historically for online retail, the 1Q of the year sees the lowest sales, while it gradually increases in 2Q and 3Q, then explodes in 4Q (usually a 40-50% increase compared to 1Q) due to the holiday season. I don’t think SHOP will have 110% growth YoY for the rest of the three quarters in 2021, but even if we only get 50% growth in the next 3 quarters, which is quite conservative in my opinion, FY 2021 revenue would still be .68 billion, almost a 15% beat. More importantly, that means SHOP right now has a forward P/S ratio of around 34, which is still quite high but not that crazy for a SaaS company.

I honestly was quite surprised even before the earnings came out, that the average 2021 revenue estimate was .1 billion, which only represents a 40% YoY growth. Now, if you look at any metrics for growth in SHOP’s 1Q earnings, there is not a number that is even close to 40%. Everything is 60%+ and/or triple-digit growth across the board. Personally, I think a 60% YoY growth in revenue for 2021 is much more likely.

The pandemic-driven eCommerce boom is here to stay, at least for SHOP

The logic here is simple. If the pandemic tailwind for eCommerce is to go away for SHOP, it would have happened already in 1Q 2021, as restrictions were eased across the US, Canada and the UK last quarter as vaccines began to roll out. The thing is, I am not sure if the economy reopening will hurt Shopify. The large business owners on Shopify like Nestle (OTCPK:NSRGY), Pepsi (PEP), Unilever (UL), Budweiser (BUDBC), The Economist, Tesla Motors (TSLA), Red Bull and so forth are not going to leave Shopify just because the economy reopens, and it is even less likely for the small business owners/entrepreneurs who don’t really have an incentive to own a physical store which requires more capital to get started and are often more costly to maintain. I think this is at least partly reflected in the accelerated growth of subscription solutions revenue in 1Q 2021.

The CEO of SHOP also mentioned that they are not seeing any slowdown of GMV growth in countries like Australia and New Zealand where the economy has opened up more so than the US or Canada. Finally, generally speaking, retail sales, whether online or in-store, should go up as the economy opens up and start to recover more. After all, retail sales are the leading macroeconomic indicator.

Potential risks

The main risk for SHOP is the high valuation. Lot of the future growth has been priced in, and a potential increase in bond yield can put some pressure on a hypergrowth stock like SHOP, as we have seen in the last few months. Inflation as a systemic risk can threaten the entire stock market including SHOP. Also, SHOP likes to raise money and shore up its cash position even when it already has a comfortable cash cushion. As an investor, you hate to see your shares get diluted, but at the same time also glad to see that SHOP has a strong .87 billion cash position.

Conclusion and trading strategy

SHOP will have a lot of potential upside in the long term if its growth story continues to unfold. So far, I have no reason to doubt their growth potential, and the recent 1Q 2021 earnings only cemented my belief. However, because of its high valuation, I only recommend it for long-term investors who are willing to hold the stock for 5+ years at least.