Shopify’s (NYSE: SHOP) Q2 results prove it can navigate and thrive in a challenging environment. Highlights include outperformance in every metric, robust cash and free cash flow, and an outlook for market-beating growth and margin over the coming year. The net result is that the stock price is up 25% on the news and still has at least 15% upside forecasted. The critical takeaway is that this company is building momentum and will likely outperform its robust guidance because of its value proposition to retailers. Shopify helps them get digital, reach clients, save money, and scale profitably.
Shopify Rises On Blowout Results
Shopify’s results are best described as a blow-out, including strength in all segments and comparisons. The company reported $2.05 billion in net revenue, a gain of 21% compared to last year, beating the consensus by 200 basis points, including the impact of divestiture. As part of its margin-widening strategy, the company sold off its lower-margin logistics business, which paid off in spades.
Organically, growth is closer to 25%, driven by a 22% increase in gross merchandise volume. The 25% gain in volume is a testament to the strength of consumers, compounded by the company’s lean into marketing and penetration of services. Merchant Solutions grew by 19%, aided by the increasing use of Payments services. Gross payment volume increased by 58%, now 61% of the GMV. Subscriptions grew by 27% on merchant volume and higher pricing; monthly recurring revenue increased by 25%.
Margin is the best news of the lot. The company widened its gross and operating margin due to leverage, divesting the logistics business, and other internal efforts. The salient details are that adjusted earnings of $0.26 outperformed by 31% and reversed losses in the previous year. More importantly, the free cash flow margin more than doubled to 16% and is expected to remain at this level for the remainder of the year.
The company's guidance is solid. It forecasts revenue growth of 20% to 25% in Q3 and gross margin improvement of 50 basis points year over year. That’s good for sequential growth of nearly 2% and is better than the consensus forecast reported by MarketBeat.
Shopify Builds Value For Shareholders
Shopify’s results led to significant improvement to the balance sheet. The company reported increased cash, current, and total assets compounded by reduced liabilities. The balance sheet is net cash, and leverage is ultra-low. Leverage is running at roughly 0.1x assets, leaving the company robustly positioned to reinvest in growth and on track for capital returns.
Analysts have yet to issue revisions based on the news, but we know they are coming. The quick look reported by Wedbush includes a reiterated Hold rating but promises to review estimates and price targets. Because the results are so strong, estimates and price targets will likely be increased, which can be expected from the group. Until then, 39 analysts covering Shopify stock have shown a high conviction in the Moderate Buy rating. The consensus target is near $76 and implies a 15% upside.
Shopify Fires A Solid Signal, but Risks Remain
Shopify is firing a solid buy signal with price action up more than 25%, creating a solid green candle moving up to the cluster of moving averages. The signal is compounded by a strong signal in the stochastic indicators, but there are technical risks. Among them is the MACD, which has yet to cross the signal line from bearish to bullish, and the cluster of moving averages. The MACD shows that momentum remains bearish despite the gains, and the moving average may act as resistance. In that scenario, Shopify stock could remain range-bound near current levels. However, a move higher will trigger a strong signal that may lead to a complete reversal for the market. The critical resistance is near $90.
