Shopify shares plunge even as Ottawa firm eyes $1B in 2018 revenue

Tobi

Shopify (NASDAQ:SHOP)(TSX:SHOP) pointed to platform upgrades and international expansions as the path towards $1 billion in annual revenues as earnings continue to climb for Ottawa’s e-commerce giant.

Despite the strong results, shares of Shopify dropped 10 per cent as trading opened Tuesday morning on the Toronto Stock Exchange. The company's stock price partially recovered later in the day, closing down five per cent, or $8.51, to close at $163.50 per share.

During the firm’s quarterly conference call, CEO Tobi Lütke expressed rare frustration with analysts who he perceives to be in search of, as he put it, Shopify’s “Achilles’ heel.”

Towards $1B

Shopify reported revenues of $214.3 million for the quarter ending March 31, a 68 per cent increase year-over-year. The fastest-growing revenue segment was in merchant solutions – Shopify’s earnings on transaction fees and other services such as shipping and financing – which grew 75 per cent from the same period a year ago to $114.1 million in Q1. (All figures in USD.)

Monthly recurring revenue was also up 57 per cent to $32.5 million. The firm’s oft-touted premium model, Shopify Plus, accounted for $7 million.

Shopify’s merchants are also doing well in the first quarter of the year, with gross merchandise volume of $8 billion on the platform, up from $4.9 billion in 2017.

The upward trends in Shopify’s books drove the firm to place its full-year guidance between $1 billion and $1.01 billion, an increase of roughly 50 per cent over actual revenues of $673.3 million in fiscal 2017.

Despite the growth, Shopify posted another net loss of $15.9 million in the quarter compared to $13.6 million a year ago.

Also growing at Shopify this past quarter was stock-based compensation, which Lütke attributed to hiring more executive-level roles as the firm grows. He told the earnings call that the only way to build a “world-class company” was to pick a geography and become “the place to work for” in the region, thereby attracting top-tier talent.

“They cost quite a bit, to say the least,” he said.

Achilles’ heel

Tuesday was the first earnings call for Shopify’s new chief financial officer Amy Shapero, though she wasn’t on board yet during the quarter. Shapero replaced the firm’s first CFO Russ Jones following his retirement earlier this year.

Asked where she sees potential to grow in the coming years, Shapero echoed earlier comments in the call from chief operating officer Harley Finkelstein, who said upgrades to the firm’s merchant platform, focus on international markets and “widening the funnel” to bring new users into the Shopify Plus model would yield the most returns for Shopify in the future.

Shapero added that the decade-old firm is still in the “early innings” of its run in the e-commerce space.

“One thing we are not lacking at Shopify is opportunity,” she said.

Still, Shopify’s executive team declined multiple times to elaborate on where that potential is coming from in the company. Analysts looking for details about where the firm is seeing international traction, updates on a merchant count and the numbers of users making use of dropshipping on the platform were left empty-handed.

Lütke addressed the lack of disclosure in his closing remarks.

“The emergent theme of this phone call, I think, is Shopify is a pretty big platform,” he said.

Lütke added that Shopify’s diverse offerings and revenue streams make it a rare beast. Those who focus on the firm’s controversial dropshipping and partner program – such as short-seller Andrew Left – are failing to take in the full picture of the company, he suggested, instead looking for Shopify’s “Achilles’ heel.”

“Shopify is really just putting something online that human beings have been doing for thousands of years, which is commerce,” he said. The firm is taking advantage of “pent-up demand” for a one-stop e-commerce platform, he said, adding that he’s surprised the market isn’t more crowded.