Canadian Stock Series: The Downbeat Guidance Sent Shopify Shares Sharply Lower

According to the disclosed financial report, in the first quarter of 2024, Shopify reported:

Total revenue of $1.861 billion, a year-over-year increase of 23%; of which, merchant solutions revenue was $1.35 billion, up 19.89% year-over-year, and subscription solutions revenue was $533 million, up 20.06% year-over-year;

Gross profit of $962 million, a year-over-year increase of 30.35%, with a gross margin of 52%, up 6.12% year-over-year;

Net loss of $273 million, compared to a profit of $68 million in the same period last year, and a net profit of $657 million in the previous quarter;

GAAP diluted loss per share of $0.21, compared to $0.05 in the same period last year; adjusted earnings per share of $0.20, compared to $0.01 in the same period last year;

Before the earnings report was released, the market expected Shopify's performance to be around 20% revenue growth with a gross margin that remained roughly flat. Thus, Shopify met expectations on several of these metrics. So why did the stock price fall so dramatically?

In terms of revenue, Shopify's performance in the first quarter was actually satisfactory to the market: total revenue of $1.861 billion exceeded the market consensus estimate of $1.845 billion. The two components of revenue: subscriptions (income from merchants using the monthly subscription fee for the Shopify platform) and merchant solutions (covering a range of transaction processing and additional services provided by Shopify to merchants) both achieved around 20% year-over-year growth.

Chart: Shopify Quarterly Total Revenue Changes by Segment (Millions of Dollars)

As an e-commerce company, GMV and MRR maintained a strong growth momentum consistent with or higher than the same period last year, mainly driven by the continuous growth in platform users and merchant numbers, and the increasing penetration rate of Shopify's own payment method, Payments.

Chart: Shopify Quarterly MRR and GMV Changes (Millions of Dollars)

Therefore, as shown in the two charts above, excluding the seasonal revenue growth factor in the fourth quarter, Shopify's revenue growth and various metrics in the first quarter of 2024 were consistent with the trend. From the increase in GMV and MRR, it can be seen that even in a challenging economic environment, Shopify has maintained its growth momentum and even gained market share—with a 22.77% year-over-year increase in GMV, significantly outpacing Amazon's 7% growth.

In terms of profitability, Shopify's operating profit was $86 million in Q1, maintaining positive earnings for three consecutive quarters. However, Shopify incurred a net loss of $273 million in the first quarter, with gross profit and operating expenses showing slight improvements compared to the same period last year. The significant net loss of $373 million was primarily due to losses from other operations, specifically from unexpected losses on securities and investments measured at fair value.

Chart: Changes in Shopify's Unadjusted Net Profit (Millions of Dollars)

As the chart shows, after achieving profitability in the previous two quarters under GAAP and posting positive profits, Shopify broke this two-quarter trend of continuous improvement in the current quarter. Despite increased revenue and gross margin, Shopify failed to achieve sustainable profitability.

Considering the financial data disclosed in the previous two quarters, most of the company's net profit growth came from other income, including interest income, realized/unrealized net gains, equity investments, and other items. Therefore, when economic downturns and rising interest rates occur, Shopify's profitability will be under significant pressure, and the stock price may also face downward risk.

Against the backdrop of an uncertain economic outlook and lukewarm global consumer spending, total revenue growth for the second quarter is expected to be sluggish, with a year-over-year increase of 15% to 20%, the lowest level in two years.

At the same time, the company expects operating expenses to grow by a low to mid-single-digit percentage in the second quarter, compared to a 4% decrease in the first three months of the year. In terms of profit, due to the sale of the logistics business to Flexport last year and planned increases in marketing investments, the company expects the gross margin to decrease by about 50 basis points in the second quarter compared to the first quarter.

As a growth company, Shopify's high expected revenue growth is the main driving force behind the company's sales multiples, and such guidance clearly does not satisfy investors.