Shopify Delivers Growth And Efficiency; Shares Surge

Key Points

• Shopify wowed investors with Q1 results and sent shares up more than 25%. 
• The guidance assumes similar results in Q2 plus an improved margin. 
• Divestitures and labor-force reductions are at the heart of margin improvement.

Shopify NYSE: SHOP had the opportunity to deliver growth and efficiency in Q1, and it did that and more. The results and outlook have the stock up more than 20% and are on the cusp of a complete reversal. Given the outlook for growth and profitability, analysts will likely up their targets, which is what this market needs. The analysts have been lowering their targets and ratings for the last year and causing a massive drop in the stock price. The takeaway is that the bottom is in for this market, and a sustainable rally can form if only the sell-side will commit to the investment in e-commerce stocks . 

There are 35 analysts with current ratings on this stock, so there is potential for significant head and tailwinds from that quarter. As it is, the consensus is a Hold and down from Moderate Buy with a price target 18% below the post-release action. Notably, the latest activity was in April and included 2 initiated coverages, 1 at Outperform and an upgrade to Outperform with a price target consistent with the new highs. Assuming that develops into a trend, the catalyst for reversal is here. 

The institutions are also a headwind for price action that is dissipating. The institutions sold $10 worth of the stock over the past year and have their holdings down to 50%, but activity is slowing. The last few quarters have seen selling drop from $13 billion in Q2 2022 to nearly $225 million in Q2 2023, and buying is also picking up again. 

Shopify Wows Market, Guides For Strength 

Shopify had a wow quarter reporting $1.51 billion in revenue. That is up 25.8% YOY, beating the Marketbeat.com consensus by 480 basis points. The gains were driven by a 31% increase in Merchant Solutions compounded by penetration of payment services and Subscription Services growth. Gross payment volume grew to $27.5 billion and 56% of revenue or up 400 basis points YOY. The monthly recurring revenue, an indication of subscription health, is up 10%, and the margin is also strong. 

"Shopify's strong first quarter results demonstrate once again that we're the go-to solution powering businesses of all sizes, on every surface where they sell. The changes we're announcing today will ensure we keep pace with the high velocity of change before us, delivering the cutting-edge solutions our customers have come to expect from Shopify,” said president Harley Finkelstein.

The company’s margin contracted at both the gross and operating levels. Still, less than expected, and 1-offs in the statement also impacted results—the $0.01 in adjusted earnings beat the consensus for bottom-line results by a nickel and came with solid guidance. The company expects Q2 results to match Q1 except for margin improvement, improved profitability and positive free cash flow every quarter this year. 

Among the efficiencies helping to drive the outlook are a labor-force reduction of 23% and divestiture of assets. The divestiture is the logistics arm of the business, which will go to Flexport for a 13% equity interest. Shopify already has a significant stake in the company, so the move will remove costs, including labor while improving cash flow from its investment. 

Shopify Melts Up On Profitability 

Shopify shares are melting-up on good news and may move into rally mode soon. The critical resistance point is $60; a complete reversal is possible if the market gets above. If not, this stock may be range bound while the market digests the news and prepares for the 2nd half of the year.