Shopify’s Long-Term Story Hasn’t Changed

Shopify (NYSE:SHOP) is a powerhouse in the e-commerce world, but it doesn’t sell anything itself: It runs the platforms that help other retail businesses operate online. And its growth rate has been phenomenal. So why did its shares drop after its Q4 report Tuesday, when it again put up impressive growth numbers?

Well, as Market Foolery host Mac Greer and senior analysts Andy Cross and Jason Moser explain in this segment of the podcast, it was a slightly slower growth rate than in prior quarters, and the company is forecasting that this mild deceleration will continue. For investors, the question now is: Where’s Shopify headed? The Fools discuss, factoring in the software-as-a-service (SaaS) company’s current lack of profitability, its strategy, and more.

A full transcript follows the video.

This video was recorded on Feb. 12, 2019.

Mac Greer: Let’s talk Shopify. Shares down after the company reported fourth-quarter earnings. Shopify is a behind-the-scenes e-commerce platform that allows businesses of all sizes to set shop up online. Andy, a lot of us don’t know that name, Shopify, but if we’re online, there’s a good chance we’re interacting with a business that uses Shopify. The stock has been a long-term market-beater. What do you think of the latest news?

Andy Cross: It was a fantastic quarter, it’s just that they’re going against their own great growth expectations. They saw growth in sales of 54%. Their subscription solutions, so their monthly subscription solution sales, were up 42%. Their merchant solutions, these are two businesses that Shopify thrives in, merchant solutions, which includes shipping, Shopify payments, their Shopify Capital business, that saw 63% growth. Overall, the continued growth story at Shopify has been fabulous and it continues.

However, Mac, compared to last quarter, the growth rates were a little bit slower.

Greer: And they’re losing money, right? You say the word “fantastic,” but then I see the headline about this fourth-quarter loss, and I’m like, what gives?

Cross: Well, they are losing money like a whole lot of SaaS businesses.

Greer: Is that “fantastic?”

Cross: Yeah! For a growth company, for an $18 billion growth company —

Greer: Do I look “fantastic” then?

Cross: You don’t look fantastic. You don’t look nearly as fantastic as Shopify. This growth story continues. Their expectations for a little bit slower growth might have got some investors a little bit spooked, and that’s why the stock is selling down for the first quarter. But this is a company that has always outdid its own expectations, and it did this quarter as well, too. When I think about the long-term opportunity to provide e-commerce solutions to more than 600,000 clients around the world, the Shopify platform continues to get richer and richer.

Now, when you look at a stock that’s done so well, and it sells at 16X sales, compared to something like Salesforce at 10X sales, and Shopify is reminding me a lot of Salesforce. It has a young founder-leader in Tobi Lütke, who, by the way, said that Shopify was the fastest-growing company to $1 billion in sales of all SaaS companies of all time. It reminds me a lot of Salesforce, and it’s a little bit more expensive than Salesforce, but for the growth picture and for the opportunity, I still like Shopify long term. It’s a long-term holding of The Motley Fool. We’ve done very well with it. The growth prospects continue to be really impressive, especially how they’re continuing to innovate and provide these client solutions for these customers around the globe.

Greer: OK, I was giving you a hard time. But when I do see the headlines here, that they reported a fourth-quarter loss, how do I square that with everything you just said? Do I look at that as, Shopify is investing and I’m going to give them a wide berth, just like people gave Amazon over the years when they were losing money? Or is this a loss to be concerned about?

Cross: No. It’s an accounting loss. They’re still generating cash flow and they have a load of cash on the balance sheet, more than a billion dollars in cash on the balance sheet. So, yes, they are making a loss, but they’re making these investments for the long term. This is the way that a lot of these growth companies invest their cash, invest the money they make from their sales. And the operating profit on an adjusted basis was up a little bit this quarter versus last quarter. If you account for some stock-based compensation, they’re actually making a little bit of money. But yes, they are investing a lot into the business.

Jason Moser: We see this with a lot of the businesses that we cover. You can tie this back to the initial conversation we were having about a lot of cash on the sidelines. These are the types of growth companies that have these neat futures that we love to think about. But, it’s worth remembering, as you noted, they’re not profitable yet, and profits do matter. We look at the fundamentals of the business, the cash they generate, and we can see that three, five years down the road. It’s also worth remembering that Wall Street, for better or worse, is focused on an earnings-per-share number. Most of these companies are valued on earnings multiples, and when they’re not, it requires a little bit more context, which Andy gave to us. Again, a company that owns a lot of the market it’s pursuing, it just has to really invest a lot up front to build out that product.

Cross: I’ll just say, they have a little bit of flexibility on the profit side to dial down or up their investment. It’s just like we saw with Netflix over the years. Right now, they continue to invest, and Tobi continues to invest back in the business and recede on the growth side.

Moser: You think about how big that market opportunity is. I mean, you’re talking about e-commerce writ large. The entire world, basically. That’s a massive opportunity. I like looking at that market opportunity, putting our investments into that context, because it really gives you an idea of how far they potentially could go.

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