Shopify: This Is Just The Beginning

seekingalpha2021-04-30

Summary Shopify put out some great numbers in its latest earnings report. The company is offering increased value to merchants by expanding its offerings, and this will drive profitability. Using EWT...

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Jlenglui
·2021-04-30
Ok
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- PjunReplying toJlenglui:
  yo
  2021-05-03
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- Jlenglui:
  Bu
  2021-05-03
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- Pjun:
  love you
  2021-05-03
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Bestbet
·2021-04-30
Nice
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Tiger boi
·2021-04-30
Comment n like
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The most important takeaway here is that SHOP has been able to greatly increase its profitability. Why? Because it is offering its customers (merchants) more value. I reiterate my buy rating in this article and establish a $2,700 target using EWT.\nCompany Overview\nShopify Inc. recently delivered an outstanding earnings beat. While revenues grew fast and profitability increased significantly, it is important to take a deeper look at the numbers:\nSource: Shopify Q1 2021\nThe income statement above shows Shopify’s latest quarterly results as well as those for the first quarter of last year. Gross profit more than doubled and outpaced the growth of its operating expenses. However, the Net Income and EPS results we see here are misleading. This is the non-adjusted or non-GAAP EPS, which came out to $9,94. The real reason behind this massive jump in EPS is through an unusual item of over $1.2 billion, which is revealed in the earnings callis due to a one-time sale of an investment in a company that has recently IPO’d.\nHaving said this, Shopify still delivered some great numbers:\nSource: Shopify Q1 2021\nActual GAAP operating expenses went down from 70% of revenues this time last year to only 44%. Adjusted operating income came in at 21% of revenues compared to -2% last year, which is still very encouraging. Behind this were lower operating expenses and costs of revenues relative to the whopping 110% increase in revenues.\nHow did Shopify do this and just how much more profitable can the company become?\nShopify Is A (Great) Platform\nIn my last article, where I compared Shopify to Amazon.com (AMZN), I made the point that Shopify is actually a platform, like Microsoft Corporation (MSFT), which means there is no ceiling to how much value it can offer.\n\n A platform is when the economic value of everybody that uses it exceeds the value of the company that creates it. Then it's a platform.\n\n\n Source:Bill Gates\n\nThis is why, unlike many other companies, Shopify can deliver such impressive earnings growth. Specifically, I would point towards a few factors that have been playing out over the last few months/years that are showing great results.\nFirstly, in 2019 Shopify acquired 6 River Systems in order to further increase their services to merchants in the realm of fulfillment and shipping solutions. At the time, speculation over the effectiveness of this was questionable. However, as we learned in the earnings call, over half of the eligible merchants in the U.S. and Canada are using Shopify Shipping. This is very encouraging information. Shopify offers both Shopify Shipping and Shopify Fulfillment Network, which will soon be rolled out to new countries. This is just one of a few ways Shopify is adding value to their customers, which are the merchants.\nSecondly, I would also like to talk about the success we have seen with Shopify’s POS, Shop Pay and Shopify Payments. Shop Pay is Shopify’s payment checkout,which recently partnered with Facebook(FB) to offer this option on the Instagram and Facebook platforms. Needless to say, this has done wonders for the adoption of Shop Pay. Shopify Payments, which is used for merchants to process payments, has also increased adoption substantially.\nSource: Investor Presentation\nThe above shows how Shopify Payments, Shop Capital and Shop Pay’s adoption has increased YoY. We also see here Shopify’s Shop, which is an app designed to act as a marketplace for consumers and is showing encouraging results.\nOn a last note, I would like to talk about Shopify Capital. Through this service, Shopify has provided over $2 billion in capital to smaller merchants. This is an incredibly valuable service since many of these small merchants might not have access to funding otherwise. Also, looking at the financials, it’s encouraging to see that “transaction and loan losses” have come down significantly. Shopify Capital though is much more than a lending platform since it also allows merchants to have a separate business account, a business debit card and even reporting tools.\nThe above are just some of the most significant ways Shopify is adding value to its platform. A few years ago, I had my doubts about whether Shopify would be able to successfully move into shipping or financing, but the numbers Shopify is putting out quarter after quarter show this is exactly what they are doing. Since Shopify is a platform, there is no limit to the value it can offer, which means there is no limit to the profits and profit margins it can achieve.\nValuation\nShopify is a company that holds lots of potential, but it is hard to know what profit margins will look like. In this section, I am going to attempt to reach a target price for Shopify using Elliott Wave Theory.\nSource: Author’s work\nLooking at the big picture on Shopify’s chart, we can see a clear five-wave structure developing. I would say we are now in a larger degree third wave, and within this third wave, we can also see a five-wave structure developing, shown here with the blue numbers. Specifically, I’d say we are somewhere in the third wave of the third wave, which could easily target the 138.2% extension at around $2,735.\nThe larger degree third wave though could take us up to the $4,000 region, which is where we have a nice fib confluence at the 161.8 extensions for both the larger and smaller degree moves. I’d expect a pullback in a larger degree wave four after that, and a final leg up which could take us to +$7,000. Bear in mind this is a long-term target.\nRisks\nHaving said all this, we must take into account a few things. For starters, I would expect growth to slow down in the next quarter. The pandemic shifted the world to online, but in the last few months, we have seen many economies fully reopen. This will impact online spending negatively, as people will be eagerly going to bars, restaurants and engaging in activities which they couldn’t do during the lockdown. I would expect the next quarter to deliver weaker numbers, especially with the high expectations Shopify has set up after this quarter.\nOn another note, Shopify’s revenues are inherently determined by consumer spending, and this could take a turn for the worst if, for example, we see inflation rise, or we see long-term rates increase, which will reduce the value of home equity. These are important things to take into account. Shopify is doing a great job, but there will be softer quarters and hard times ahead.\nTakeaway\nI would say this latest earnings report has made me a convinced Shopify believer. The company is executing well across the board and holds a lot of potential in both profitability and earnings. I don’t think another company in the world can offer its merchants the kind of value that the Shopify platform and ecosystem does, which truly makes this a unique company with a lot of 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