BUY-rated Shopify Inc. (NYSE: SHOP) slipped 3% on 10/29/20 after delivering well-above-consensus revenue and non-GAAP EPS for 3Q20. Revenue was almost 20% ahead of expectations, while non-GAAP EPS more than doubled Street expectations. Equally impressive, gross merchandise volumes (GMV) across customers’ retail platforms exceeded $30 billion, more than $2.5 billion ahead of expectations, while increasing 109% year-over-year.
In the era of the behemoth that is Amazon.com, Shopify has emerged as a key enabler of integrated retail platforms for small and medium businesses. The company is ‘leveling the playing field for entrepreneurs’ during a period of unprecedented change in the retail landscape. The company expects to attract more ‘independent voices,’ and will continuing investing in its platform on their behalf. Subsequent to quarter-end, Shopify launched the TikTok channel, enabling merchants to market their products using TikTok for Business.
Early in the pandemic, Shopify offered an extended 90-day free trial of its services, which expired on 5/31/20, and a standard 14-day free trial, which has been in place ever since. A large number of ‘freemium’ customers appear to have moved over to the paid-subscriber model.
Revenue topped the $650 million consensus forecast by nearly 20%; management did not issue 3Q20 guidance. With costs running up less quickly than revenues, Shopify posted a non-GAAP profit of $1.13; adjusted EPS increased by $0.08. Shopify crushed profit expectations, as the consensus had been looking for non-GAAP profit of $0.48.
Shopify’s metrics in 3Q20 were impressive. We note that Shopify did not report the huge sequential jump in revenue, GMV and other metrics that it did in 2Q20. That may explain why the stock sold off on blow-out results. In our view, the pandemic’s sudden emergence drove the outsized sequential growth experienced in 2Q20.
In the spring quarter, desperate merchants anxious to get their products to market intersected with Shopify’s 90-day free trial service, which ran from March 31, 2020 to May 31, 2020. Shopify has since implemented a standard 14-day trial. The company indicated as much late in July 2020, when it indicated that the huge step-up in GMV during April and May began to decelerate in June; that trend carried into July. We believe the 2Q20 sequential surge was a one-off, and that a more moderate though still strong pace of sequential growth will drive more sustainable operating metrics going forward.
During 3Q20, Merchant Solutions revenue of $522 million (68% of total) rose 132% year-over-year and 1% sequentially, following 83% sequential growth in 2Q20. Gross Merchandise Volume (GMV) across Shopify’s customer platforms totaled $30.9 billion for 3Q20, which was up 109% year-over-year and 3% sequentially.
By contrast, sequential growth in Shopify’s Subscription Solutions business was much stronger than in Merchant Solutions. We believe this business benefited from surging growth in Merchant solutions year-to-date and particularly during 2Q20.
For 3Q20, Shopify’s Subscription Solutions revenue of $245 million (32% of total) was up 48% annually and 25% sequentially. Subscription Solutions segment growth was aided by more merchants joining the platform, and their purchase of apps, themes, and other growth aids. Monthly recurring revenue of $74 million was up 47% annually and 30% sequentially.
Two days before the earnings release, on 10/27/20, Shopify announced an intriguing partnership with TikTok, the hugely popular short-form video site based out of China. Under the partnership arrangement between the two companies, TikTok will offer Shopify merchants a dedicated channel to create and manage add campaigns targeting the social networking site’s enormous global base.
The partnership also provides participating merchants with analytical tools that will them tailor and refine their messages for maximum effectiveness. As a further incentive, TikTok will also offer a $300 advertising credit for eligible merchants to help them jump-start their ad campaigns.
TikTok is in a tenuous place in the U.S. An agreement between Oracle and Walmart to purchase partial rights to TikTok had not finalized. TikTok’s position in U.S. app stores remains in limbo, with the U.S. government having threatened to ban the service. A hearing related to the potential ban, along with the temporary injunction blocking the ban, is scheduled to be heard in November.
With all this in mind, it is worth remembering that Shopify is based in Ottawa, Ontario. Washington has a habit of pressuring its allies to fall in line with its policies. Nonetheless, relations between the Canadian and U.S. governments have cooled. As it seeks to monetize its huge user base, TikTok may have felt that Shopify offered the least potential government interference, particularly compared with already-under-the-gun U.S. social media platforms.
In our view, merchants have come to realize that the pandemic period will be extensive, and that some aspects of consumer behavior are changed forever. With COVID-19 entering what appears to be a ‘third wave’ in the U.S., the shelter-at-home phenomenon appears likely to persist long beyond the period initially envisioned when the virus emerged.
Consumers appear content or at least resigned to stay at home until one or more vaccines are approved and widely distributed; timelines for vaccine availability, too, are being pushed out. Merchants now reckon that creating or enhancing a robust online presence is far more important than planning for a nebulous physical reopening.
The Shopify platform enables merchants to manage all aspects of their physical and virtual go-to-market.
In terms of new services offered, Shopify is offering its merchants easy access to Shop Pay Installments, which lets merchants offer their customers more payment choice and flexibility at checkout. The company is also building the foundation of its Shopify Fulfillment Network. Rather than a physical logistics network, this software-based network enhances merchant support network. Then again, 10 years ago no one was expecting to see Amazon Prime package vans on every corner.
Shopify is not offering 4Q or full-year 2020 guidance. But the company reiterated that it is ‘uniquely positioned to level the playing field for entrepreneurs’ during the current period of rapid change and disruption.
EARNINGS & GROWTH ANALYSIS
Revenue topped the $650 million consensus forecast by nearly 20%; management did not issue 3Q20 guidance.
Non-GAAP gross margin was 53.8% for 3Q20, vs. 53.4% for 2Q20; year-earlier comparisons are meaningless.
With costs running up less quickly than revenues, Shopify posted a non-GAAP profit of $1.13 per diluted share, compared with a year-earlier non-GAAP loss of $0.29 per share; adjusted EPS increased by $0.08 from a non-GAAP profit of $1.05 per share in 2Q20. Shopify crushed profit expectations, as the consensus had been looking for non-GAAP profit of $0.48.
FINANCIAL STRENGTH & DIVIDEND
During 3Q20, Shopify issued $750 million in Senior Convertible Notes.