Shopify Inc. (NYSE: $SHOP) is a leading e-commerce platform based in Ottawa, Canada, allowing businesses of all sizes to set up an online shop. Established in 2006, the platform offers an all-in-one solution that lets companies set up shop, market to customers, and access advanced business data analysis.
On Tuesday, February 13, 2024, before markets opened, Shopify released its fourth quarter fiscal 2023 results, which showed strong growth in merchant numbers. Despite this, the stock fell 13% on a weak 2024 guidance.
Financial Highlights
Shopify Inc. posted Q4 revenue of $2.1 billion, soaring 24% year-over-year and 30% on an adjusted basis, exceeding the analysts’ forecasts of $2.07 billion. Adjusted earnings per share came in at $0.34, above expectations of $0.30. Its gross merchandise volume (GMV) saw an increase of 23% to $75.1 billion, surpassing consensus estimates of $71.53 billion, an increase of $14.2 billion compared to the previous year’s fourth quarter, while Merchant solutions revenue grew 21% to $1.6 billion year-over-year.
The free cash flow margin grew to 21% compared to 5% in Q422 with free cash flow of $446 million, compared to $90 million the previous year. As of December 31, 2023, Shopify had $5B in cash, cash equivalents, and net cash of $4.1 billion after considering their outstanding convertible notes.
For FY23, Shopify announced a 26% increase in revenue to $7.1 billion. Sales figures indicate the strength of the merchant relationships amidst economic headwinds. The full-year free cash flow was $905 million, a huge improvement from a negative free cash flow of $186 million in fiscal 2022.
Shopify President Harley Finkelstein stated: “2023 was an incredible year for both Shopify and our merchants. Our strong Q4 and annual results are a powerful testament to the progress we have made building fast, reliable, and unified software for merchants of all sizes.”
Weak Q1 2024 Guidance
While Q4 earnings and revenue topped expectations, investors were concerned about Shopify’s forecast for the first quarter 2024. The company forecasts revenue to rise at the rate of low twenties year-over-year and mid-to-high twenties on an adjusted basis. Its adjusted revenue forecast was below expectations, with investors expecting Shopify to continue its strong momentum of 30% growth.
The company forecasts a free cash flow margin in the high single digits for Q124, with sequential increases throughout 2024. That figure came as a disappointment to investors after the strong 21% FCF margin reported in Q423.
Commenting on the low FCF margin guidance, William Blair analyst Matthew Pfau said, “In our view, the main item pressuring the stock is the lower-than-expected free cash flow guidance. Investors were likely not expecting such a significant decrease in FCF margin.”
Other analysts shared their opinion on Shopify’s Q4 results. Jefferies analyst Samad Samana said, “Q4 operating margin missed consensus by 10 basis points. The Q1 2024 growth outlook was strong, but the operating guidance may limit some enthusiasm.”
Evercore ISI analyst Mark Mahaney said, “We believe the company has identified new opportunities/efficiencies and is choosing to lean into them,” he commented.
Shopify (SHOP) Stock Performance
Shopify shares plunged 13.4% to close at $77.18 on Tuesday, February 13th, 2024, erasing $11.94 from its share price. The sharp decline came after the company reported fourth-quarter results that topped expectations but provided a disappointing outlook for 2024. During early morning trading on Wednesday, February 14, 2024, Shopify stock had recouped some of the losses, and was 2.31% at $78.96 per share as of 10:29 AM EST..
The Tuesday share price retreat comes after a 15% rally year-to-date through last week. Shopify has been a pandemic-era darling as small businesses increasingly went online to cope with COVID disruptions. However, its complex fulfillment ambitions dragged on profits.
Thoughts Going Forward
Despite the post-earnings shellshock, Shopify still has opportunities as digital commerce grows. However, it faces challenges proving it can translate merchant growth into stronger profitability rather than simply weighing on margins.
Ultimately, Shopify’s success rests on boosting its value proposition for merchants enough to support premium pricing. If rising subscription fees outpace the utility offered to its customer base, it risks merchant losses, slower growth, and margin erosion.
For now, markets are taking a show-me stance regarding Shopify’s business model’s resilience. Markets will watch closely in coming quarters to see whether strategic investments fuel accelerated growth or compress margins further.
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