Written by Amy Legate-Wolfe at The Motley Fool Canada
Shares of Shopify (TSX:SHOP) surged 21% last week, as the company flew past earnings estimates. Shopify stock saw profit grow amidst a huge strategy shift that seems to be working for the company. So, what should investors do now?
A look at earnings
First, let’s go over earnings for Shopify stock. The company reported revenue that grew 25% year over year, with gross profit up an incredible 36% compared to the year before. This led to free cash flow that was positive for the fourth quarter in a row, hitting 16% of its revenue.
The e-commerce company also saw gross merchandise volume, an important metric for the stock, increase by 22% to $56.2 billion. Its gross payments volume also grew to $32.8 billion, a 54% increase compared to 2022 levels.
Recurring revenue was up 32%, with the Shopify Plus plan contributing 31% of monthly recurring revenue for the quarter. As mentioned, gross profit was also an impressive $901 million, up 36%. The company now continues to have substantial cash on hand, with free cash flow at $276 million, and operating income at $122 million. That’s a huge win, as the company operated at a loss the year before.
Business is booming
While the headline was that the company’s strategic shift of focusing on ecommerce and getting out of logistics seemed to be working, there was other business going on. This included pricing for a brick-and-mortar business operation for clients to use a Shopify stock point-of-sale (POS) system. Payments is now a key focus, it seems, with several POS terminals, upgrades, and expansions rolled out during the quarter.
And no longer are Shopify stock and Amazon at war with each other! Shopify stock announced an app integration that would allow merchants in the United States using Amazon’s fulfillment network to have the option of adding Buy with Prime through the company’s app ecosystem at Shopify Checkout. Transactions are processed through Shopify Payments, while using Amazon’s fulfillment network.
“Our third-quarter results demonstrate the progress we are making to further solidify Shopify’s position as the global leader in commerce,” said Harley Finkelstein, president of Shopify. “Our ability to help our merchants succeed in any economic environment by delivering innovative product solutions, has not only built strong trust with our merchants but has positioned Shopify for sustained growth and profitability for the future. As we look forward to the busiest shopping season of the year, we’re confident that our unified commerce platform empowers our merchants with the tools they need to seize every opportunity and achieve greater success.”
Shopify stock provided an outlook for 2023, stating the company expects to reach full-year revenue growth in the mid-20s year over year. This would be pushed along by the fourth-quarter holiday sales from Black Friday and Cyber Monday weekend. Further, that fourth-quarter stock-based compensation should hit about $100 million.
Analysts were in awe over the performance, as the stock surged past estimates. They were most impressed by the gross merchandise volume growth, and, of course, profit. It’s the highest growth since 2021. So, clearly, the company made the right move.
Additionally, analysts believe Shopify stock can be conservative in its guidance, leading many to believe that its outlook could be even higher. However, it is dependent on sales, of course, and should consumers not spend as much after a difficult year in the markets, this could hit Shopify stock dramatically. That leaves the stock to continue being a pretty risky choice.
That being said, reaching profitability has been huge for Shopify stock. Long-term investors should certainly continue to see such strong performance on average compared to the drops of the past — especially now that the company has learned its lesson about growing too much, too soon.
The post Shopify Stock Jumps 21% After Strong Profit and Strategy Shift appeared first on The Motley Fool Canada.
Before you consider Shopify, you'll want to hear this.
Our market-beating analyst team just revealed what they believe are the 5 best stocks for investors to buy in October 2023... and Shopify wasn't on the list.
The online investing service they've run for nearly a decade, Motley Fool Stock Advisor Canada, is beating the TSX by 25 percentage points. And right now, they think there are 5 stocks that are better buys.
See the 5 Stocks * Returns as of 10/10/23
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Fool contributor Amy Legate-Wolfe has positions in Shopify. The Motley Fool has positions in and recommends Shopify. The Motley Fool recommends Amazon. The Motley Fool has a disclosure policy.