Shopify Inc (SHOP.NYSE)
21 February 2018
Take that short sellers
BUY
Fundamentally this was another great quarter from Shopify. The company continues to deliver strong
revenue growth that is gradually starting to transition to growth on the bottom line. In 6 years the company has grown its revenue 29x and is starting to become a significant player in the ecommerce space with over $1 billion in gross merchandise volume processed over Black Friday/Cyber Monday. The company has brushed off the calamity in the last quarter from the short selling attack by Citron Research and the stock trades at all time highs. We maintain our buy rating.
Fourth Quarter 2017 Earnings Highlights:
• Strong 4th quarter revenue growth of 70.9%
• Company expects just under $1 billion of revenue in full year 2018.
• Strong Monthly Recurring Revenue is beginning to underpin the company’s growth
• Valuation not for faint hearted
Fourth Quarter Revenue:
Total revenues for the fourth quarter of 2017 were $222.8 million. This represented a 70.9% increase from the fourth quarter of 2016 and a massive 30% sequential growth from the third quarter. This beat market expectations by $13.52 million. We are mighty impressed with the top line growth, especially that the company was able to grow revenues by 30% across a single quarter. We believe that the numbers validate
the fundamental strength of the company in the face of the short selling attack by Citron Research in the third quarter. We intensely debated the validity of the attack internally and are pleased that we stuck with our buy recommendation.
The chart below illustrates quarterly revenue since the first quarter of 2014. We expect revenue growth to remain strong but to decelerate over time as the company approaches critical mass. As always with SHOP, the more the better.
Full Year Revenue:
Full year revenues came in at $673.3 million, or a 73% increase over 2016. The
company continues to get it done on the top line, revenue has grown 29x since $23.71
million reported in 2012. We expect over $1 billion of sales in 2018.
expanded its global footprint by launching Shopify payments in New Zealand and Singapore.
Short Attack:
There was no mention from the company about the short attack by Citron Research
from the last quarter. We checked the Citron website and the company still displays
the short report from October 2017 but with the stock trading at all time highs it
appears the market has moved on from the report. And unless Citron is still holding a
position that by now will be showing a massive loss with unlimited upside risk, we
suggest that they have as well.
Comment:
“That our merchants sold more in the fourth quarter than in all of 2015, achieving
one billion dollars of this in just four days, speaks to how far we have come in the
past few years…Our leadership role in commerce, together with the scale we have
achieved, position us well to invest in our next phase of growth: one marked by
expansion of our capabilities upmarket and down, in retail, in our ecosystem and
internationally” – Russ Jones, Shopify CFO
Valuation:
It is hard not to get into a conversation about SHOP without considering valuation.
And the stock is not cheap. The company has no earnings so price to earnings ratio is
useless. The company is trading on forward sales of around 14x, based on our
estimates of forward 2018 sales of $1 billion. The stock therefore is priced for growth
and the company needs to continue on its growth trajectory. The risk for investors is
that if for any reason the company does not deliver on its growth then the stock price
will likely be hit.
Summary:
Shopfiy remains on course to deliver $1 billion of revenue in 2018. Despite
management guidance, we would expect nothing less. This growth underpins the
investment case and to date SHOP has been able to deliver. We maintain our buy
rating and are pleased that the clouds behind the short selling attack have disappeared
for finer weather.
