Shopify (NYSE: STORE) The stock rose 17% in early trading on better-than-expected gains. Management outlined that the company will get back on track after a couple of weak quarters, where sales came in much lower than expected. Managing Shopify had previously stated that investments in the product mix had resulted in lower-than-expected profits. Investments were important to get the company back on track for growth.
Shopify’s investments are paying off
Monthly recurring revenue increased 8% to 107% as Shopify Plus merchants and store locations used the point-of-sale (POS) service to generate monthly recurring revenue (MRR). MRR for Shopify Plus was 33% compared to 28% in the same quarter of 2021. Shopify has continued to target entrepreneurs or start-ups and then seeks to turn them into Plus merchants in the future by offering a range of services that company can help enter the field of small and medium-sized enterprises.
Shopify had double-digit growth in gross retail value, up 11% for the quarter. Gross payment value increased from 49% of total gross trade value (GMV) to 54% of GMV year-over-year (YOY) as the adoption of new merchants in the US and internationally drove sales, helping to drive profitability. improve thanks to a better mix . Merchant solutions grew by 26% and Shopify is investing more and more in this service as it aims to improve the synergy between merchandise sales and payments. Seller solutions typically have lower margins, leading to a 9% increase in gross profit to $681 million, lower than revenue, which grew 22%.
Business losses remain a factor. The current quarter witnessed a loss of $45 million compared to a profit of $120 million in the same quarter in 2021. The lack of profitability can be attributed to a lower margin product mix and rising costs. These costs largely stem from sales and marketing and R&D, both of which make up a significant portion of Shopify’s operating expenses.
Tailor-made for small businesses
Despite the current economic conditions, small business optimism further improved in October, marking three months of continued improvement. Inflation remains the main topic for small businesses, but the number of small businesses that will (or plan to) raise prices has fallen to 51% in the past month, according to the National Federation of Independent Businesses.
Shopify has also started attracting some major merchants, including Cole Haan and Panasonic, along with already established players like Gymshark. Shopify also continues to partner with a range of tech companies such as: Pinterest (NYSE: PINS) and integrates partners such as Stripe and paypal (NASDAQ: PYPL) on its platform to better serve customers. By integrating these partners on its platform, the company has allowed itself to attract higher margin customers who already have an established sales network. This could help bring margins back to previous levels and return the company to profitability faster than investors expect.
International markets will remain key to Shopify’s growth if the ecommerce giant maintains its pace of growth. Shopify continued to improve its international presence during the quarter by allowing merchants to sell products across borders and by offering a range of logistics, currency and marketing solutions, leading Shopify Markets to add 175,000 merchants to its platform in recent months.
Shopify Capital offers advances to merchants and small businesses should also see significant growth in global markets. Since the Dodd-Frank Act, many small businesses have been lagging behind in terms of working capital, which gives Shopify the opportunity to fill the gap that banks usually fill. As small businesses continue to seek capital in a tightening environment, Shopify Capital took advantage of the conditions and total lending grew 29% YOY to $509 million for the third quarter.
Shopify’s inventory is down nearly 80% from its 52-week high and is currently trading at about 7x sales, making it still relatively expensive. Historically, stocks with expected growth of around 20% to 25% could expect a valuation of 5x. A lack of profitability will make investors cautious despite the post-profit rally. Because the product mix lowers gross margins, the long-term result may also be lower than other technology companies. Unlike competitors such as: Amazon (NASDAQ: AMZN), Shopify does not have high capital expenditures, with average capital expenditures of around $45 million.
Shopify will continue to focus on global expansion and improved cross-selling as it looks to bring more merchants from the entrepreneurial and basic service level to the SMB and Plus level. Shopify is focused on expanding globally as well as providing better tools so that its merchants can continue to make that leap. For now, expansion plans are working, but investors will look to Shopify to become profitable. Long-term profitability could be around 20%, taking into account current gross margins. For now, management is focused on expanding both services and global penetration.
Overall, Shopify is trying to establish itself as a premium ecommerce company, offering end-to-end service. It remains to be seen if the strategy will pay off compared to competitors like WooCommerce and BigCommerce, who have taken a much more focused approach to merchants.