Shopify Inc (SHOP) NPV

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Shopify reported a 31% rise in fourth‑quarter revenue to $3.7bn ($3.6bn expected). Growth was broad, driven by a 31% increase in the value of orders processed through the platform to $124bn.

Operating profit rose 36% to $631mn, driven by the top-line growth.

Free cash flow rose 17% to $715mn, and there was a net cash balance of $5.8bn at quarter‑end. A new $2bn buyback was announced.

First‑quarter guidance points to revenue growth in the “low thirties” (25% expected).

The shares rose 11.0% in pre-market trading.

Our view

Shopify delivered a good quarter and strong guidance. But fears around AI disruption are proving too much right now, and having initially risen in pre-market trading, shares ended up down 6% on the day, continuing a trend of underperformance this year.

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, but investors are still unsure about which software names will be winners or losers. For the moment, everything is being chucked in the loser bucket. We think Shopify is well placed to adapt and evolve as new ways to shop take hold.

Last year’s announcement of Shopify within ChatGPT and developments with Google’s Gemini are a perfect example of where AI can add value. Shopify is taking first-mover advantage in what we think will be a major shift in how we shop. We’re also excited about the improved journeys on social media platforms, as another avenue where younger shoppers are spending more time.

We share some of the market’s 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, is the main revenue driver, tying Shopify’s success closely to that of its customers.

Aside from investing in the business, the group’s been keeping a tight grip on costs, and the underlying financial profile has significantly improved in recent years. We believe investor concerns around near-term cash flow headwinds are overdone - investment for growth is positive in our eyes.

Overall, we’re impressed by Shopify’s leading proposition. There are several potential growth levers, from expanding beyond the US, a new generation of AI and social media shoppers, to the adoption of its services by larger players.

We think the current valuation offers upside. But AI disruption is a valid concern to monitor, and we would flag that trading at c.68x earnings, it will be a volatile name.

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.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by LSEG. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.

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