Shopify Inc. revealed Thursday that it expected to outperform the rest of the commerce sector even as its massive pandemic-driven growth decelerates, sending shares up more than 7 per cent.
The Ottawa merchant-services company took in US$1.12-billion in the third quarter. That marked 46-per-cent growth from the same period a year ago – compared with 57 per cent in the second quarter and 110 per cent in the first quarter.
Analysts had predicted revenue for the quarter to come in at US$1.15-billion, making this the first time results missed estimates since Shopify went public in 2015. Still, its share price popped Thursday to close up 7 per cent at $1,800.04 on the Toronto Stock Exchange.
“The ‘miss’ isn’t actually being viewed as a miss,” said Canaccord Genuity analyst D.J. Hynes in a research note. Given the surge in e-commerce that sent Shopify soaring last year, he said it would be “silly” to consider the quarter’s revenue growth disappointing, “especially when you’re lapping 96 per cent growth a year ago.”
The difference between results and expectations was too small to be a significant disappointment for investors, National Bank of Canada analyst Richard Tse said in an e-mail. By coming so close, and providing a strong outlook for the next quarter, Shopify “firmly countered such concerns,” he added.
The company also announced a US$1.15-billion profit Thursday – equal to US$9 per diluted share – that was buoyed by a US$1.34-billion unrealized gain in the company’s investments. In fact, for the nine months ending in September, its stakes in Affirm Holdings Inc. and Global-E Online Ltd. delivered gains of US$3.36-billion – accounting for more than Shopify’s total profit of US$3.29-billion so far this year.
There is no guarantee that such profitability can be sustained. Neither of Affirm nor Global-E are profitable, despite their share growth - they’ve both posted losses in recent quarters.
Shopify’s stakes in private companies reached US$528-million in the quarter. That includes an investment of US$375-million in Stripe, its payment-processing provider, which may deliver further gains if it goes public. The company revealed Friday that it bought additional $200-million in convertible notes in Stripe in the past three months, bringing the total amount of its investment to US$575-million – more than even the $450-million it spent to buy the warehouse robotics company 6 River Systems in 2019. Convertible notes are bonds issued by a company that may be converted to stock at a future date.
In recent years, Shopify has positioned its offerings as world-leading tools for entrepreneurs to succeed in a retail environment dominated by giants such as Amazon.com Inc. That includes shipping and warehouse services, which chief financial officer Amy Shapero said has strong demand. That is anchored in part by sales from its stock-picking 6 River Systems robots, which she said tripled over last year.
On Wednesday, the company revealed it had deployed the robots at a Saks Fifth Avenue warehouse. “Who would have guessed robots would be picking Christian Louboutin pumps and Giambattista Valli gowns,” Shopify president Harley Finkelstein tweeted.
The sustainability of Shopify’s growth remains unclear. Though Shopify surged to become Canada’s most valuable company as it helped entrepreneurs transform themselves for a digital-first pandemic economy, the company now faces new economic pressures. Although Ms. Shapero said on a conference call with analysts that it expects revenue to continue to grow rapidly through the rest of its fiscal year, the company believes the growth will be slower than in the first year of the pandemic.
Ms. Shapero said consumers spent noticeably less online in July, and more on travel and entertainment, though online retail improved through August and September. She also said that Shopify noticed a downtick in spending associated with the winding down of government stimulus incentives in the United States. But the company said that physical retail sales now account for a greater share of the total volume of purchases made through Shopify, as new merchants stick with the brand while they reopen bricks-and-mortar locations.
With the holiday season coming up, the current quarter is crucial for all retailers. Shopify said it projected the revenue for the quarter to be its highest for the year, but did not offer an estimate, and said in a release that “revenue spread will be more evenly distributed across the four quarters than it has been historically.”
Shopify’s merchants also face another global problem: supply-chain backups and the subsequent increased cost of goods. “The challenges are, of course, real,“ chief executive officer Tobi Lutke said on the analyst call Thursday. “Pressures in supply chains, increasing logistics costs and things like this – and inflation is harder, too, for us to judge.” But he said he believes that Shopify, through its scale, can help shield merchants from increased costs.
With reports from Sean Silcoff.
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