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Shopify Earnings Review - The New-Normal Tailwind

Romans Chapter 8 verses 38-39 state, "For I am convinced that neither death nor life, neither angels nor demons, neither the present nor the future, nor any powers, neither height nor depth, nor anything else in all creation, will be able to separate us from the love of God that is in Christ Jesus our Lord."


God's love is impenetrable if we choose to accept it. That makes me feel a lot better, knowing that if I choose to accept Jesus Christ, that I will never be separated from God. Jesus Christ tells us to "deny ourselves and pick up our cross". I find that my emotions always tend to negate God's word far too often. Regardless of my imperfections, I can always find my way by acknowledging the truths of the Bible.

For investing, I like thinking about God's protection as my life is His. This makes me view market cycles very differently. In fact, there is nothing to lose when it comes to investing in the stock market, when my life's investment is in Christ. This doesn't mean I take extreme risks, but it means that there is a place for growing wealth, that will end one day, and there is a place for God, that is a higher priority, and eternal.


Today, this logic is very applicable to a company like Shopify, Inc. (SHOP). The company is taking advantage of what I am calling the new-normal tailwind, which relates to a post-COVID world for e-commerce and Internet-based companies. I believe that Shopify will see very successful performance over the near-term. Many will be cautious and somewhat fearful as to whether growth will continue, and there will likely be opportunities to average the portfolio's position further.

Shopify

Shopify is a leading global commerce company, providing trusted tools to start, grow, market, and manage a retail business of any size. Shopify enhances ecommerce for everyone with platform and services that are engineered for reliability, while delivering a better shopping experience for buyers everywhere.


In an era where social media, cloud computing, mobile devices, and data analytics are creating new possibilities for commerce, Shopify provides differentiated value by offering merchants:

  • Multi-channel front end: Software enables merchants to easily display, manage, and sell their products across over a dozen different sales channels, including web and mobile storefronts, physical retail locations, pop-up shops, social media storefronts, native mobile apps, buy buttons, and marketplaces. More than two-thirds of our merchants use two or more channels.

  • Single integrated back end: Software provides one single integrated, easy-to-use back end that merchants use to manage their business and buyers across these multiple sales channels.

  • Data advantage: Software is delivered to merchants as a service, and operates on a shared infrastructure.

  • Brand Ownership: Shopify is designed to help our merchants own their brand, develop a direct relationship with their buyers, and make their buyer experience memorable and distinctive.

  • Mobile: As ecommerce expands as a percentage of overall retail transactions, a trend that accelerated in 2020 as the global COVID-19 pandemic necessitated physically distanced commerce, buyers expect to be able to transact anywhere, anytime, on any device through an experience that is simple, seamless, and secure.

  • Infrastructure: Shopify builds its platform to address the growing challenges facing merchants and with the aim of making complex tasks simple.

Shopify's key financial metrics as of today's filing and on a Last Twelve-Month, LTM, period are as follows:

  • Net Cash Position: $6.4 billion

  • Revenues: $2.9 billion

  • Gross Margin, GM: 53%

  • Operating Cash Flow, OCF / Margin: $425 million / 14.5%

  • Free Cash Flow, FCF / Margin: $454 million / 15.5%

  • Shares Outstanding: 125 million

  • Subscription Solutions Rev: $799 million

  • Merchant Solutions Rev: $15 million

  • Gross Merchandise Volume (GMV): $120 billion

  • Gross Payment Volume (GPV): $54 billion

Shopify's fiscal year ends every December 31st of each calendar year. For the full 2020 year, Shopify witnessed Revenue growth at 86%, reflecting a substantial increase from the prior annualized 59% three-year performance. This was largely related to COVID impacts over the past year, expanding both of the company's Revenue segments. Management has stated that they do not expect this level of growth to continue, however, robust growth is still anticipated for 2021. GM declined by 220 basis points, while OCF/FCF margins increased by over 200% and 300% respectively, and nominal values increased by 600% and 700% respectively.

Key drivers including GMV and GPV increased by 96% and 110% respectively. Shopify is the second largest e-commerce business in the U.S. behind only Amazon (AMZN). At the same time, Shopify saw Subscription Solution Revenue growth by 42%, only slightly increasing from 2019, and declining from the 50% annualized three-year performance prior. Merchant Solutions Revenue grew by 116%, substantially increasing from the 66% annualized three-year performance prior, and driving the majority of Revenue performance for 2020.

During COVID, merchants continued to us Shopify's Subscription Solutions to establish Point-of-Sale, POS, capabilities, registration of domain names, app sales, among other items. However, Merchandise Solutions were exponentially driven by COVID related to payment acceptance, shipping and fulfillment, and securing working capital, among others. This Revenue split was a core driver for reducing GM, as Merchandise Solutions GM is near 40%, while Subscription Solutions GM is just below 80%.


During the earnings report, Shopify clarified that moving forward, the growth rates should track much more closely between these Revenue items. This is a hint towards management's thinking for 2021 growth, and some confirmation that Shopify's Subscription Solutions service should be capable of sustaining growth towards 40%, or marginally higher.

Key updated valuation metrics for Shopify include:

  • Enterprise Value, EV: $168 billion

  • EV/Revenues: 57 times

  • Net Debt/OCF: N/A

  • Stock Price, SP/OCF per Share: 408 times

Since earnings results, 12 analysts increased their PT average from $1,154 to $1,435, with the highest PT being $1,680 and the lowest being $1,275. I think we'll see some higher PTs exceeding $2,000, as their are still around 18 that have yet to update post-earnings. The current SP sits at $1,385 per share, trading with a very strong premium at 57 times EV/Revenue, and an OCF/share at 408 times. While these multiples are very high, Shopify is growing into its OCF/FCF multiples at a fast rate.

My PT over the next 18-month period is aggressive at $2,275 per share. I think that Shopify is going to continue to command a very high EV/Revenue premium at around 50 times. And I see Shopify growing more into its valuation from an OCF/FCF perspective closer to 275 times per share multiples. Shopify has witnessed a substantial cash flow inflection, and moving forward, I feel that the company can sustain and even see further margin expansion over the next five years.


Once the market recognizes that Shopify still has robust growth potential the next couple years, PTs will continue to increase over the near-term. Shopify will be a core company to revisit each quarter to determine the e-commerce trajectory of the new-normal for consumers as well as merchants. Many businesses are looking at increasing e-commerce merchant services moving forward, including those shifting towards omni-channel models, which will still benefit companies like Shopify.

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