E-commerce platform in Canada.$Shopify (SHOP.US)$ / $Shopify Inc (SHOP.CA)$ The company is expected to announce its Q3 earnings for the 2024 fiscal year before the market opens on November 12th, Eastern Time. The market generally expects the company's revenue for this quarter to reach $2.13 billion, with an earnings per share of $0.18.

Following a strong growth in the second quarter, Shopify's stock price has rebounded from losses earlier in the year. As of the market close on November 11th, the stock price has accumulated a rise of over 17% since the beginning of this year.

Review of Shopify's Q2 performance in the 2024 fiscal year

GMV and revenue growth strong.

$Shopify (SHOP.US)$ In the second quarter, the Gross Merchandise Volume (GMV) was $67.2 billion, a 22% year-on-year growth. This was due to the strong same-store sales of existing merchants, global expansion of the merchant base, strong performance in the European market, and growth in offline and B2B channels. Excluding logistics business sales revenue, the revenue was $2 billion, a 25% year-on-year growth. This was driven by significant growth in subscription solution revenue from more merchants and higher subscription pricing, as well as growth in merchant solutions with expanded GMV and deep integration of Shopify Payments.

Profitability improved.

Q2 gross profit surged 25% to $1 billion, even exceeding revenue growth. Operating expenses were $0.804 billion, better than expected, due to reduced marketing and compensation costs, as well as lower-than-budgeted summit activities. With the absence of logistics business and the impact of layoffs, operating income reached $0.241 billion. Free cash flow more than doubled to $0.333 billion, accounting for 16% of revenue, demonstrating strong operational leverage within the company.

Dynamic strategic innovation.

Shopify is optimizing marketing and operations, targeting high ROI opportunities with an 18-month payback period, especially controlling costs in marketing and compensation. The company is leveraging artificial intelligence and automation to increase productivity, resulting in a 51% increase in merchant acquisitions on new social platforms. New partnerships demonstrate the platform's attractiveness to well-known brands, showcasing its leading position in the business field. Recent investments in checkout customization, inventory visibility, and onboarding further enhance Shopify's product and market coverage.

Key points to watch for in Shopify's 24th fiscal year Q3.

As Shopify is about to release its third-quarter financial report, investors can pay attention to the following key aspects:

GMV growth rate

Shopify's commodity trade volume has grown significantly, nearly sevenfold since 2018. Barclays bank expects Shopify's GMV to reach $286 billion in 2024, up from only $41 billion in 2018. This growth is attributed to attracting a large number of brands and expanding international operations. As Shopify integrates its recent acquisitions to enhance merchants' capabilities, people will focus on how these measures help accelerate total GMV growth. Additionally, when assessing the sustainability of Shopify's growth, the implementation of artificial intelligence and automation to improve operational efficiency and customer experience are also crucial.

Monetization rate

The monetization rate (take rate) represents the percentage of GMV retained as revenue, which is crucial for evaluating Shopify's revenue growth potential and overall financial condition. In the Q2 2024 earnings call, management emphasized that their strategic focus is to provide value-added services to maintain a high monetization rate. However, as competition intensifies in the e-commerce platform sector, maintaining or increasing this rate remains challenging. Management is closely monitoring improvements in merchant services and technical integration.

Key revenue sources

Shopify's revenue mainly comes from merchant solutions and subscription solutions. Merchant solutions (especially Shopify Payments) processed $41 billion GMV, with a penetration rate of 61%. Meanwhile, subscription solutions provide a stable revenue base, with a 27% increase in revenue due to the expanding merchant base and strategic price adjustments. Additionally, Shopify Plus and Point of Sale (POS) solutions play vital roles in the company's growth. Plus merchants contribute to GMV growth, especially in Europe, and offline GMV for POS solutions increased by 27% year-on-year. Updates on these revenue sources will provide important information for Shopify to maintain its growth capabilities in an ever-changing market environment.

Profit outlook

Management expects Q3 total revenue to increase by around 20% year-on-year, thanks to strong GMV performance and the popularity of high-margin products such as Shopify Payments and Shopify Plus. Shopify's goal is to maintain a stable gross margin by expanding into international markets and enhancing B2B business capabilities. With optimized marketing expenses and effective management of compensation costs, operating expenses are expected to remain stable. Additionally, the company is committed to maintaining a strong free cash flow margin by improving the revenue-to-cash conversion rate, leveraging technology to increase productivity and cost management. Investors can focus on the company's continued efficiency improvements and growth achievements in the upcoming report.

Analysts' Views

Analysts' attitudes vary, reflecting both bullish and bearish sentiments:

Bullish View

Citibank maintains a 'buy' rating with a target price of $103. The company expects Shopify's revenue to grow from the end of 2024 to 2025, with improved profitability, and EBIT expected to grow by 60% year-on-year. The cross-selling of Shopify's payment applications and merchant solutions enhances investor confidence. By 2028, the lower interest rate environment may lead to a GMV of $645 billion.

Deutsche Bank maintains a 'buy' rating with a target price of $85, expecting its third-quarter performance to improve due to the growth of market share in various segments. GMV is expected to grow by 22% year-on-year, exceeding expectations. Strong payment transactions and an expanding merchant base will support revenue growth, while operating margin may improve due to reduced marketing expenses.

RBC Capital maintains an 'outperform large cap' rating with a target price of $100, citing third-party data indicating strong merchant growth. This suggests that monthly recurring revenue may exceed expectations, while profit margins may increase due to cost controls.

Bearish View

According to Bloomberg's point of view, investors should consider several key risks facing Shopify. The company heavily relies on Shopify Pay, which accounts for about 60% of its GMV and three-quarters of its revenue, making it vulnerable to economic cycles. The recent increase in subscription prices may lead to higher customer churn, especially among small businesses. In addition to these concerns, Shopify's conservative expectations for third-quarter sales may not meet the expected 21% growth due to uncertainty in spending by small and medium-sized enterprises and potential decline in consumer spending. Strategic challenges persist, including Shopify's decision to avoid direct consumer sales and significant investments in the Shopify Fulfillment Network. The focus of the market remains on whether the migration of large merchants can mitigate these risks.

Data Source: Seeking Alpha, the Fly, Bloomberg, MT Newswires