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Shopify After Q1 2023 Earning: A Game-Changer Move

Updated: May 9, 2023

Shopify (NYSE, TSX: SHOP), the leading global commerce company, announced its first-quarter 2023 financial results on May 4, 2023, before markets open. The results were impressive, but what caught everyone's attention was the major change in Shopify's business model.

Shopify

Picture: Shopify. Source: Unsplash


As noted by Business Insider, Shopify revealed that it had sold the majority of its logistics business, Deliverr that it bought for 2.1B in 2022,to Flexport, a global freight forwarding and customs brokerage company that Shopify invested in last February, for an undisclosed amount and an additional 13% equity. Flexport will become Shopify's preferred logistics partner, offering Shopify merchants access to its platform and network of carriers, warehouses, and fulfillment centers. This is an effort to be more lean and light weight to position itself in a weaken economic environment by CEO Tobias Lütke as he said "Side quests are always distracting because the company has to split focus".


Shopify also announced that it had reduced its headcount by 20%. The company said that it was leaning into its partner model ecosystem, relying more on its network of developers, agencies, and app makers to provide solutions and services to its merchants. As a whole, Shopify will be asset lighter and refocus on its original model before Covid.


Why did Shopify make these changes?


According to Shopify's president, Harley Finkelstein, in his short two-minute video and earning call released on Thursday, the company wanted to focus on its core mission of providing essential internet infrastructure for commerce. He said that Shopify was not a logistics company or a customer service company, but a platform company that enables anyone to start, scale, market, and run a retail business of any size.


Harley Finkelstein

Picture: Harley Finkelstein. Source: Wikimedia Commons


By selling its logistics business to Flexport, Shopify can free up resources and capital to invest in its platform and products, such as Shopify Payments, Shop, Shopify Plus, and Shopify POS. By reducing its headcount and leaning into its partner model ecosystem, Shopify can leverage the expertise and innovation of its partners to offer more value and choice to its merchants. All in all, the company wants to "operate with even greater speed and efficiency" moving forward. In fact, this is demonstrated clearly when Tobi Lütke did not join the conference call to focus on the organization.


How did these changes affect Shopify's financial performance?


The short and simple answer is: positively. Shopify reported revenue of $1.51 billion for Q1 2023, up 25% year-over-year and beating analysts' expectations of $1.435 billion. The revenue growth was driven by strong growth in subscription solutions revenue (up 31.1% year-over-year) and merchant solutions revenue (up 23% year-over-year). Shopify also reported earnings per share of $0.01 for Q1 2023, beating analysts' expectations of a loss of $0.04 per share. The earnings improvement was mainly due to lower operating expenses as a result of the headcount reduction and the sale of the logistics business. Comparing to last year earning, this is a good improvement on earning but deteriorate in earning per share.


Shopify ended Q1 2023 with $4.2 billion in cash and cash equivalents, up from $3.8 billion at the end of Q4 2022. The company said that it had ample liquidity and financial flexibility to pursue its growth strategy and invest in its platform and products. In fact, with the heavy cash-eating logistic business out of the way, it is highly possible that Shopify can end the year with positive cash flow. This view is shared among analysts with average updated earning per share for Shopify now reached 0.11 USD (see picture below).


Analyst estimation

Picture: Analysts estimate for Shopify. Source: Yahoo Finance


When the year started, Shopify has 11,600 employees and contractors. Now, with the new breaks, the lower headcounts should help the company to achieve this goal.


What is Shopify's outlook for the rest of 2023?

The company did not provide a full guidance for Q2 2023 or full-year 2023. However, Jeff Hoffmeister, the CFO of Shopify, expected to spend $100 millions on operations and maintaining free cash flow, which is an improvement from the $130 millions for operations in 2022.


Shopify said that it expected to continue growing its revenue at a faster rate than the e-commerce industry as a whole, as more merchants choose Shopify as their preferred platform for online selling. The company also said that it expected to improve its profitability margin over time as it scales its platform and products and benefits from operating leverage, as well as more aggressive cost control.


Based on these assumptions, we can make some predictions for Shopify's earnings per share and revenue for full-year 2023. Similar to how I predict Apple's number for 2023, there will be 2 scenario, with and without recession.


*** These projections are based on our own analysis and assumptions and may differ from Shopify's actual results or guidance. Investors should exercise their own judgment and due diligence before making any investment decisions based on these projections. Full disclosure: I hold a small amount of Shopify shares at the time of this writing


Without Recession

Using a conservative estimate of 20% revenue growth for full-year 2023 (lower than Q1 2023's growth rate), we can project that Shopify will generate revenue of $6.5 billion for full-year 2023. Since the company now operates on a lighter asset model, we can believe that Shopify will earn $0.13 per share for full-year 2023. This is due to the fact that even though recession might be avoided, the continuous weaken of financial sectors are causing ripple effect across industries.


On a positive side, the US job report on Friday posted an average hourly earning rose 0.48% in April (6% annualized). The situation is almost identical for Canadian market, with 5.2% annualized YOY average hourly wages. This reiterates a strong and resilient labour market and increases the likely hood of avoiding recession.


With Recession

In the event of a shallow recession (based on the current economic situation so far) with an assumed revenue growth rate of 8% for full-year 2023, Shopify's financial outlook would be substantially different than the no-recession scenario. With an 8% revenue growth rate, Shopify's full-year 2023 revenue projection would decline by approximately $4,780 million, coming to the low of $6 billion as opposed to the $6.5 billion estimated in the no-recession scenario. This reduction in revenue would inevitably impact the company's earnings per share (EPS).


Given the lighter asset model and the reduced revenue growth rate, it is reasonable to expect a decrease in EPS projection but still able to maintain a positive number compared to the no-recession scenario. However, as noted in the conference call, the mass layoff costs a decent chunk in budget with severance fees and it inevitably impacts Q2 and full year 2023 result consequently. Assuming a proportionate decline in EPS, the new projected EPS for full-year 2023 would be approximately $0.06 per share, as opposed to the $0.13 per share previously estimated. However, it is still an improvement compared to last year of $0.04.


Verdict

In a nutshell, Shopify's Q1 2023 earnings report was a game-changer for the e-commerce giant. The company showed that it was willing and able to adapt to the changing market conditions and customer needs by making bold changes in its business model. The company also showed that it was capable of delivering strong financial performance. However, the recession scenario highlights the potential negative impact on Shopify's financial performance, underscoring the importance of monitoring macroeconomic indicators and adapting to changing market conditions. Thus, investors should take that into accounts when running the projection number for this company.


As the stock already moved up over 30% after the earning report on Thursday, accumulating to almost 70% YTD, it is still over 60% off from its peak in 2022. Given the EPS of 0.11 USD for full year 2023 that analysts are having, at the current price of 62 USD, the stock is trading relatively at a premium 2.25 PEG (250% EPS growth rate until 2025, analysts estimated 300%) and relatively on the same range compared to its top peers (Amazon or Etsy). For context, Etsy is projected to earn $2.43 with 15% EPS growth, making it has a 2.5 PEG ratio at the price of 92 USD. On the other hand, Amazon is trading at 105 USD with a PEG of 2.25. Therefore, unless the FED officially confirmed an avoidance of recession, I am not expecting any of these 3 stocks to to have a growth of 10% above its current price in the current economy. For Shopify, my price target is 69 USD for full year 2023 with a strong volatile.

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