Shopify joins ranks of Canada’s most profitable companies with second windfall quarter as revenues top US$1-billion

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Last year Shopify Inc . became Canada’s most valuable company. Now the tech giant is one of the country’s most profitable.

Shopify reported its second straight windfall quarterly profit Wednesday, thanks to a recent strategy to use its clout to capitalize on the spinoff value it has created.

The company’s 2021 net income after two quarters now stands at US$2.14-billion. That’s more than profits in the past two reported quarters earned by many of Canada’s largest public companies, including BCE Inc., Canadian National Railway Co., Sun Life Financial Inc., Power Corp. of Canada, National Bank of Canada, Magna International Inc., Loblaw Cos. Ltd. and Canadian Natural Resources Ltd.

Shopify, which provides online software used by merchants globally to sell goods and run their operations, also topped US$1-billion in quarterly revenue for the first time as it continued to benefit from a pandemic-fuelled surge in online shopping. While the company has warned its growth rate will moderate in the second half compared with last year’s surge, it said it expects to continue growing revenue at a rapid rate and for adjusted operating income in 2021 to top last year’s US$491.3-million.

“One of the big investor questions with Shopify is what would happen” once the pandemic subsides, analyst David Hynes of Canaccord Genuity said in a note. “So far, there’s no real signs of slowdown.”

“As the postpandemic future emerges, it is clear that retail has changed forever,” Shopify president Harley Finkelstein said during a call with analysts. Nonetheless, with its growth outlook unchanged from early in the year, Shopify’s shares closed down 1 per cent.

One thing that has changed is that Shopify has become consistently profitable, having now posted five straight quarters in the black on a net basis. Technology companies are sometimes criticized by old-school investors for focusing on revenue growth at the expense of the bottom line. Until last year, Shopify had rarely made a profit since its May, 2015, initial public offering, but investors rewarded it for consistently beating revenue forecasts.

But in the second quarter, Shopify earned a net profit of US$879.1-million, or US$6.90 a share, on sales of US$1.12-billion, and earned adjusted net income of US$2.24 a share. The company posted revenue of US$714.3-million and a US$36-million profit in the same period a year ago.

That windfall profit, like the US$1.26-billion Shopify earned in the first quarter, were the fruits of a recent strategy to capitalize on the value generated by online service providers that sell to Shopify’s 1.75 million-plus merchants. Many of these providers have grown into large companies with multibillion-dollar valuations.

Shopify has invested in a slew of them recently, buying a US$375-million stake in payments processing partner Stripe Inc. this year, and spending US$200-million for a stake in an unidentified partner this month.

Driving the second quarter profit was a deal Shopify struck in April with Global-E Online Ltd., an Israeli company that helps online merchants conduct cross-border sales in the native language and currencies of their consumers. Shopify agreed to make Global-E its exclusive outside provider of cross-border services for Shopify’s merchants in return for an undisclosed fee on transactions Global-E processes for them – plus warrants to buy 19.6 million shares for one penny each.

Global-E went public in May and its stock more than doubled by June 30, creating an unrealized paper gain of US$814.6-million for Shopify in the quarter. That compared with Shopify’s operating income of US$139.4-million in the quarter.

Shopify recorded its US$1.26-billion profit in the first quarter largely owing to a similar deal with Affirm Holdings Inc., after the provider of instalment financing for e-commerce consumers went public in January. Shopify’s investments in its partners are now valued at US$2.8-billion, accounting for 23.4 per cent of its total assets. But Shopify’s big stakes in public companies could drag on future profits if their stock prices swoon. For example, it booked an unrealized US$68.4-milllion loss on its Affirm holding in the quarter.

That likely won’t matter to analysts, who focus on Shopify’s core operation. During the second quarter, it booked $334.2-million in subscription fees charged to merchants, up 70 per cent year over year, and US$785.2-million for other services including payments, up 52 per cent. Total merchant sales over Shopify reached US$42.2-billion, up 40 per cent.

Brian Peterson, an analyst at Raymond James, said in a note that he believes large-cap growth investors will continue to see Shopify shares as a “core holding” as it is still generating well-above-market growth.

Shopify announced initiatives in the quarter to expand its e-commerce presence, including making its e-commerce checkout service available to U.S. merchants selling on Facebook and Google even if they don’t use Shopify’s platform. The company advanced US$363-million to merchants in the quarter, up 137 per cent year over year, and said it now had 23 million monthly active users of its “mobile shopping assistant” app, Shop. Tobi Lutke, chief executive officer of Shopify, said the company is experimenting with selling online advertising but added “we really have no line of sight” to how that could affect revenues. Shopify now has US$7.8-billion in cash and marketable securities on its balance sheet.

Richard Tse, an analyst at National Bank Financial, said Shopify’s results were very strong with profits well above expectations. “While a large part of that is due to investment gains, it shows the breadth and potential operating leverage in their model that’s building with scale. ... Bottom line, there’s still a lot of runway.”

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