Shopify Inc.

Shopify Inc. (NYSE: SHOP) is a multi-channel cloud-based commerce platform for small and medium-sized enterprises. Subscription and merchant options are available from the company. Merchants utilize the company's software to operate their businesses across all sales channels, including Web and mobile storefronts, physical retail locations, social network shops, and marketplaces.

 Latest News

• First quarter results announcement: Shopify Inc. announced on 5 May 2022, financial results for the quarter ended March 31, 2022.
• Acquisition of Deliverr: Shopify has agreed to buy Deliverr, Inc., a fulfillment technology company, to give millions of merchant’s simplicity and scalability, as well as to eliminate the complexity of fragmented supply chain management. According to the terms of the deal, Shopify will purchase all Deliverr's outstanding securities in a USD 2.1 billion transaction that will include roughly 80% cash and 20% Shopify Class A Subordinate Voting Shares.
• Stock split announcement: Shopify announced a 10-for-1 split of its Class A and Class B shares, as well as governance changes, which will be voted on at its Annual General and Special Meetings of Shareholders in June.

First–Quarter FY22 Financial results

• Strong boost in top-line financials: Total sales increased by 22% to USD 1.2 billion in the first quarter, representing a two-year compound annual growth rate of 60%. Due to stimulus and COVID-19 lockdowns, the first quarter of 2021 saw the business's best revenue increase in its existence as a public corporation. Monthly Recurring Revenue was USD 105.2 million as of March 31, 2022. MRR climbed 17% year over year, to USD 99.9 million on March 31, 2021, as more merchants joined the platform and the number of retail locations utilizing POS Pro grew.
• Increment in gross financials: In the first quarter of 2022, gross profit dollars increased 14% to USD 637.6 million, compared to USD 558.7 million in the first quarter of 2021, owing to a higher mix of lower-margin Merchant Solutions revenue, lower margins in Shopify Payments due to a mix, increased investments in the company's cloud infrastructure, and the impact of the change in terms for Shopify app and theme partners.
• Declining Net Profit: The company's net loss was USD 1.5 billion in the first quarter of 2022, or a negative USD 11.70 per basic and diluted share, compared to a net income of USD 1.3 billion in the first quarter of 2021, or USD 9.94 per diluted share. The USD 1.6 billion net unrealized and realized loss on the company's equities and other assets in Q1 2022 is included.
• Decline in Cash and cash equivalent: Shopify had USD 7.25 billion in cash, cash equivalents, and marketable securities as of March 31, 2022, compared to USD 7.77 billion as of December 31, 2021.

Key Risks

• New market entrant and strong competition: Many new rivals to Shopify have entered the market as more merchants place a greater focus on e-commerce products. WooCommerce and Squarespace, for example, are already big rivals in the development of e-commerce systems. In the future, big corporations like PayPal and Google may attempt to compete with Shopify, further diluting the market.

Outlook

The COVID-driven acceleration of e-Commerce in the first half of 2021 from lockdowns and government stimulus will not be present in the first half of 2022, therefore revenue growth will be lower in the first half and while increasing in the fourth quarter. Merchant Solutions revenue growth to be more than twice the rate of subscription solutions revenue increase year-over-year, with merchants from around the world joining the platform at a level equivalent to that in 2021. Finally, USD 200 million is expected in capital expenditures, USD 800 million in stock-based compensation expenses and related payroll taxes, and USD 62 million in amortization of acquired intangibles.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation

Source: REFINITIV, Analysis: Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock recommendation

SHOP’s stock price has fallen 78.8% in the past six months and is currently leaning towards the lower end of its 52-week range of USD 308.06 to USD1762.92. The price is forming a bullish divergence on RSI in the daily chart which can be seen in the graph below. As per technical analysis, a break above the short-term (50-day) SMA may start a good volume bullish momentum in the stock. We have valued the stock using the EV/Sales-based relative valuation methodology and arrived at a target price of USD 453.58.

Considering the correction in the stock price, strong production results, solid topline performance, positive outlook, associated risks, and current valuation. We recommend a "Buy" rating on the stock at the current price of USD 353.51, up 10.96% as of May 12, 2022.

1-Year Price Chart (as on May 12, 2022). Source: REFINITIV, Analysis by Kalkine Group

Technical Analysis Summary

*Closing Price as on May 12, 2022

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and a downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices. 

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decisions should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting the stock if the Target Price mentioned as per the valuation has been achieved and subject to the factors discussed above. 

Note 3: The report publishing date is as per the Pacific Time Zone.