Shopify reported a 31% rise in second-quarter revenue to $2.7bn ($2.5bn expected). Growth was broad, driven by a 31% increase in the value of orders processed through the platform to $87.8bn.
Operating profit rose from 21% to $291mn, driven by the top line growth.
Free cash flow rose from $333mn to $422mn. Net cash, including leases, was $5.6bn at quarter-end.
Third-quarter guidance points to revenue growth in the “mid-to-high twenties”.
The shares rose 16.3% in pre-market trading.
Our view
We’ve been impressed with Shopify for the past few quarters and today was no different. Sales on the platform are booming, and investors are starting to gain confidence that increased investment is driving material top line growth.
Shopify is a commerce powerhouse. But rather than selling products itself, it provides the internet infrastructure for businesses to operate online. Its platform simplifies the complex world of online retail, offering a range of tools for businesses of all sizes to create and manage their online shops. This covers website templates to payment processes, and everything in between.
Perhaps unsurprisingly, the shift towards digital shopping has been a major growth driver for Shopify. AI adds another angle, and the digital first platform is well placed to adapt and evolve as new ways to shop take hold. Case and point are the improved journeys on social media platforms, where younger shoppers are spending more time and can checkout without skipping a beat.
We share some of the markets enthusiasm, particularly for the group’s subscription-based revenue, which it collects from sellers to use its platform. While these make up a smaller portion of overall revenue, it’s still a more resilient and profitable source of income than the slice it collects on each sale.
Investments are being made to expand the range of solutions clients can subscribe to. But for now, the merchant solutions segment, including transaction fees, still contributes around two-thirds of group revenue, tying Shopify’s success closely to that of its customers.
Shopify’s customer base is broad across geographies and wage brackets, giving a layer of resilience that should hold it in good stead over the coming year. There hasn’t been any material trade or tariff impact yet, though it’s a little early to give the ‘all clear’.
Aside from investing in the business, the group’s been keeping a tight grip on costs and making sure the headcount remains stable is a real focus. Coupled with shedding the financial burden of its unsuccessful logistics company last year, there are levers in play to help support margin growth and cash generation.
Overall, we’re impressed by Shopify’s leading proposition and ability to integrate itself into merchant’s operations. There are several potential growth levers, from expanding beyond the US to the adoption of its services from larger players.
But with the sharp move higher after second quarter results, a lot of those strengths are already built into the valuation.
Environment, social and governance risk
The technology sector is generally medium/low risk in terms of ESG, though some segments are more exposed, like Electronic Components (environmental risks) and data monetisers (social risks). Business ethics tend to be a material risk within the tech sector, ranging from anti-competitive practices to intellectual property rights. Other key risks include labour relations, data privacy, product governance and resource use.
According to Sustainalytics, Shopify’s management of material ESG issues is average.
ESG reporting is in place and the board is responsible for overseeing ESG issues, but reporting does not align with leading best practices. Data privacy is an important risk, and it’s being managed well but with room for improvement. There haven’t been any major controversies from a data or cybersecurity standpoint, but it could do with improving regular risk assessments.
Shopify key facts
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
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