Key points
- Shopify had a solid quarter and is driving growth, but FCF will be compromised and weigh on the stock price.
- Growth is supported by accelerating freight volume and services penetration, so guidance may be light.
- Analysts see substantial upside for the market, but may scale back their targets now that guidance has arrived.
- 5 stocks we like best about Shopify
Shares of Shopify NYSE: BUY fell hard after its fourth-quarter results, and for good reason. The news and guidance left the market in doubt about earnings in 2024, triggering a reset for the market. The good news is that the new outlook is more reasonable and allows the company to achieve outperformance over the course of the year.
Shopify outperforms on volume and service penetration in Q4
Shopify had a solid quarter in Q4, with no disappointing results. The company produced revenue of $2.14 billion for a gain of 23.7% over last year, beating the Marketbeat.com consensus by 340 basis points.
The revenue strength was driven by a 23% increase in gross merchandise volume, driven by increased merchant services, up 21%, and higher penetration of payment services. Payment services volume grew nearly 32% year-over-year, accounting for 60% of GMV, and penetration is expected to continue. Subscription services are another strong point, growing 31%, with monthly recurring revenues growing 35%.
The margin news is impressive. The divestment of the logistics business significantly improved margin, aided by accelerating GMV growth and services penetration. Gross margin improved by 350 basis points while FCF margin, which matters most, grew by 1600. Free cash flow was $466 million or up 395%, and is expected to remain strong in the 2024, but the guidance has a problem.
Shopify expects another solid year in 2024. Growth will slow but remain solid in the low 20% range, including the divestment of its logistics business, and could beat guidance as price increases and artificial intelligence help results superior and inferior. Gross margin is expected to increase by 150 basis points, which is also good news, but free cash flow margin will contract to high single-digit levels. Free cash flow is expected to improve sequentially as GAAP operating expenses decline.
Shopify has a strong balance sheet
The FCF guidelines are problematic and responsible for the stock price implosion. However, FCF is expected to remain sufficient to support the company’s strong balance sheet. The cash position is down slightly from last year but is still solid and the balance sheet is in net cash. Leverage is also low at 0.1X, and accumulated deficit and equity capital are improving. The deficit has fallen by 25% and may disappear soon; Share capital increased by 10% and is expected to grow over the course of the year.
Analysts see substantial upside for Shopify stock, but the road to the top may not be easy. The consensus lags the market, but is up 40% over the past year and 5% in the month leading up to the report, with most of the new targets above the stock price action ahead of the release. The maximum target of $100, 25% above the current target, was set in mid-January by National Bankshares and confirmed a few days later by CBIC. Analysts are unlikely to change their consensus Hold rating now that 2024 guidance is in, but they may start cutting their price targets.
The technical perspective: Shopify falls into the business basement
Shopify’s stock price fell heavily after the release, but the worst of it may already be over. The market has fallen to a critical support level and support is still present. Assuming the market can take the $78 level as support, it should enter a consolidation and move sideways. Otherwise, Shopify could fall towards the $73 consensus, aligning with the 150-day EMA. In this scenario, once the move is completed, a solid bounce should form. Either way, investors should keep this stock on their watch list and prepare for the next buying opportunity.
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