I have a Buy investment rating for Shopify Inc. (NYSE:SHOP). I compared SHOP with Block, Inc. (SQ) in an earlier article written on April 5, 2022, and I determined Shopify to be the more attractive investment candidate of the two due to its "superior expected revenue and earnings growth rates." I have chosen to publish an update for Shopify as per the current article, in consideration of SHOP's recently announced stock split and Q1 2022 financial results.
Shopify's Q1 2022 results did not meet the market's expectations, and this has pushed SHOP's stock price lower which makes its valuations more attractive. In addition, the founder continues to be very involved in Shopify's business operations and the company has various initiatives in place to turbocharge its future growth. As such, I see Shopify as a good long-term investment deserving of a Buy rating, and see multiple reasons (as elaborated in the article) to buy its shares before the upcoming stock split in June.
SHOP's shares have done poorly, declining by -11% and -73% in the past month and the year-to-date period, respectively as per the charts below.
Historical One-Month Share Price Performance For Shopify
2022 Year-to-date Stock Price Performance For SHOP
It is easy to appreciate why Shopify's share price has underperformed if one reviews the company's key Q1 2022 metrics.
Firstly, SHOP's headline financial metrics disappointed investors. According to its Q1 2022 earnings media release published on May 5, 2022, prior to trading hours, Shopify's revenue expanded by +22% YoY to $1,204 million in the most recent quarter, but missed the sell-side's consensus top line projection by -3%. SHOP's non-GAAP adjusted earnings per share fell by -90% from $2.01 in Q1 2021 to $0.20 in Q1 2022. Furthermore, Shopify's Q1 2022 EPS came in -69% lower as compared to the Wall Street analysts' consensus estimate of $0.65 per share.
Secondly, Shopify's performance by segment wasn't up to the mark as well. Based on consensus forecasts sourced from S&P Capital IQ, SHOP's merchant solutions segment revenue of $859 million for Q1 2022 was -2% below the market's expectations of $880 million in sales for this business segment. Similarly, the actual +8% revenue growth for the company's subscriptions solutions business segment in the first quarter of this year was not as good as what the market had hoped for (+13%).
Thirdly, SHOP's key operating metric, Gross Merchandise Volume or GMV, for Q1 2022, also failed to impress the market. Although Shopify's GMV increased by +16% YoY to around $43 billion in the first quarter of the current year, investors had earlier anticipated a much higher +24% YoY growth in first quarter GMV to approximately $46 billion.
In a nutshell, Shopify's below-expectations GMV is a reflection of the normalization of e-commerce demand with the unwinding of WFH (Work-From-Home) tailwinds and reduced consumer spending in the current challenging economic environment. As such, it is natural that SHOP's shares have underperformed massively in 2022 thus far. In the subsequent section, I focus my attention on the stock split announcement for Shopify.
Prior to the company's Q1 2022 earnings release in early-May, Shopify announced on April 11, 2022, that "its Board has approved a proposed 10-for-1 split of the Company's Class A and Class B shares."
In this announcement, it is highlighted that the stock split for Shopify will be effective "as of the close of business on June 22, 2022," assuming the relevant approvals are secured. Another important date to take note for SHOP investors is June 7, 2022, when a meeting of shareholders is conducted to obtain approval for the proposed stock split.
In the next few sections of the article, I discuss the key reasons for investors to consider buying Shopify's shares prior to their upcoming stock split. In general, a stock split is marginally positive for most listed companies including Shopify, as stock trading liquidity tends to improve as the initial cost of becoming a shareholder is lower going forward. However, I think that there are other factors that are even more important in assessing Shopify's investment attractiveness, which I will elaborate on in the rest of the article.
In tandem with the stock split proposal, SHOP also disclosed plans to "authorize and issue a new class of share, the Founder share, to Mr. Tobias Lütke (founder and CEO)" in the April 11, 2022, announcement. Once this founder share is issued to Mr. Lütke, his aggregate voting power will increase from the current 34% to 40%.
A March 24, 2016, Harvard Business Review article cited a study done by "professors at Purdue's Krannert School of Management" in the same year which indicated that "S&P 500 companies where the founder is still CEO are more innovative" and "are more likely to make bold investments to renew and adapt the business model." Specifically, Mr. Lütke responded to a question on the proposed Founder share issuance at the company's Q1 2022 earnings briefing by highlighting that the Founder share supports "a structure supporting the sort of founder-ledness of a company by creating like a service-based requirement for my involvement."
In general, I prefer founder-led companies like Shopify and think that they have a better chance of achieving success, and this view is supported by the Harvard Business Review article and research study I mentioned earlier. More importantly, Shopify is now in a phase of making new strategic investments and implementing new strategic initiatives (as touched on in the subsequent section) to position the company for the future, and this makes founder involvement and control even more critical.
SHOP is currently in the process of putting new strategic initiatives in place. These strategic initiatives will naturally be a drag on Shopify's bottom line in the short term as a result of additional costs, but they should eventually assist in delivering long-term success for the company.
One key initiative and area of substantial investments is Shopify Fulfillment Network or SFN which involves providing its merchants with access to cheap, fast, and reliable delivery, and this should become a key value proposition for Shopify. In a move to further support the future growth and development of SFN, SHOP revealed in its Q1 2022 earnings press release that it had already made a deal to buy out "Deliverr, Inc., a fulfillment technology provider." Shopify also emphasized at its first quarter results call that the Deliverr acquisition will assist SFN to "accelerate its road map by assembling an end-to-end logistics platform" and "leverage SFN's and Deliverr's fast fulfillment capabilities to power 2-day and next-day delivery promises."
A Brief Overview Of Deliverr And Its Services
Another key strategic initiative for SHOP is POS Pro, which will help to drive omni-channel retailing for the company's merchants.
A Quick Snapshot Of POS Pro
Shopify disclosed at the company's recent quarterly investor call that it has added "thousands more POS Pro retail locations" in Q1 2022 and revealed that POS Pro is now available in "11 countries" globally. A December 3, 2021, McKinsey article noted the firm's research found that "in most (product) categories, brick-and-mortar retailers typically achieve an organic traffic share nearly twice that of pure (online or e-commerce) players." As such, omni-channel retailing is a rising trend, and the expansion of Shopify's POS Pro will be a key factor determining how much SHOP can capitalize on the growth opportunities in this area.
The final factor that influences the buy decision for Shopify's shares is its valuations, which I delve into in the next section.
SHOP's share price has dropped by -73% and -70% in the 2022 year-to-date and one-year time periods, respectively. As a result, Shopify's valuations have become comparatively more reasonable as compared to what they were in the past.
According to valuation data sourced from S&P Capital IQ, the market valued Shopify at 2,859 times consensus forward next twelve months' EV/EBITDA and 53 times consensus forward next twelve months' Enterprise Value-to-Revenue in early-May 2020 at the peak of the pandemic.
Based on its last done share price of $369.04 as of May 27, 2022, SHOP is now valued by the market at a consensus forward fiscal 2024 Enterprise Value-to-Revenue multiple of 3.9 times and a consensus forward FY 2024 EV/EBITDA multiple of 31.0 times. Shopify's current valuations are much more palatable following the substantial price correction.
Shopify's outlook after the stock split (June 2022) can be described as "short-term pain, long-term gain."
The company guided in its Q1 2022 results press release that "year-over-year revenue growth to be lower in the first half and highest in the fourth quarter of 2022", but cautioned that it will "reinvest all of our gross profit dollars back into the business to pursue our multiple paths to growth." SHOP's management guidance is very much aligned with the sell-side analysts' consensus expectations.
Based on S&P Capital IQ data, the consensus sell-side financial projections point to SHOP's YoY revenue growth accelerating from +21.7% in Q1 2022 and +20.1% in Q2 2022 to +27.9% and +31.7% for Q3 2022 and Q4 2022, respectively. Over the intermediate term, Wall Street analysts expect Shopify's top line expansion to accelerate from +26.2% in fiscal 2022 to +43.8% in fiscal 2024, while expanding its EBIT margin from 1.3% to 6.0% during this same period. I view these financial forecasts as reasonable, as Shopify's current strategic initiatives should pay off in terms of faster revenue growth over time, and its profitability should also improve with economies of scale and a gradual slowdown in the pace of investments.
SHOP stock is a Buy. Reasonably attractive valuations, the founder-CEO factor, and the willingness to invest for the long-term are what attracts me to Shopify's shares.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.