Sean Gallup
Elevator Pitch
My Buy rating for Shopify Inc.’s (NYSE:SHOP) shares remains unchanged.
I assessed Shopify’s business and stock price outlook with my earlier write-up for the company published on August 11, 2022. In this article, I discuss specifically about SHOP’s prospects in 2023. 2023 is expected to be a better year for SHOP as compared to 2022, as it relates to the company’s revenue growth and profitability.
Shopify’s recent Good Friday and Cyber Monday metrics are impressive, and the company seemed to have put a greater emphasis on cost and capex optimization as seen with its Q3 results. These are the key items that investors should be watching and paying attention to.
I retain my Buy rating for Shopify, as I am of the view that SHOP can deliver positive surprises in terms of above-expectations financial results for 2023.
SHOP Stock Key Metrics
Recent metrics relating to Cyber Monday and Black Friday released by Shopify have been encouraging.
SHOP’s total Gross Merchandise Volume, or GMV, for Black Friday and Cyber Monday combined, increased by +19% YoY to $7.5 billion this year. Adjusted for foreign exchange effects, Shopify’s Black Friday and Cyber Monday GMV would have grown by an even more significant +21%. Also, the number of consumers who spent money on the Shopify Platform rose by +18% YoY to 52 million for 2022’s Cyber Monday and Black Friday.
Based on the sell-side’s consensus financial data taken from S&P Capital IQ, analysts are anticipating that Shopify will achieve a high-single digit percentage YoY growth in its GMV for the fourth quarter of 2022.
It is reasonable to suggest that SHOP’s actual Q4 2022 GMV growth might beat the market’s expectations, considering the positive readthroughs from the company’s Black Friday and Cyber Monday metrics. It is worthy to note that Cyber Monday and Black Friday have historically contributed more than 10% of Shopify’s fourth quarter GMV according to my review of the company’s historical data. Therefore, the GMV data for Black Friday and Cyber Monday is a decent forward-looking indicator of SHOP’s actual Q4 2022 GMV.
What Are Shopify’s Catalysts To Watch For?
The two key catalysts for Shopify are above-expectations GMV growth and better-than-expected profitability.
SHOP disappointed investors with a +10.5% YoY increase in the company’s GMV for the most recent Q3 2022. As per S&P Capital IQ data, analysts were expecting Shopify to deliver a much higher +11.6% GMV growth in the third quarter.
But there are metrics suggesting that Shopify could potentially surprise the market in a positive manner when the company releases its Q4 2022 and full-year financial results in February 2023. As detailed in the preceding section, Shopify’s GMV growth for Black Friday and Cyber Monday has been strong, and this implies that there is a high probability of the company’s actual fourth quarter GMV surpassing market expectations. This is the first potential catalyst for Shopify in 2023.
SHOP’s second potential catalyst relates to the company’s future profitability.
The company’s sales and marketing costs contracted by -12% QoQ to $303 million in the third quarter of the current year. Shopify noted at its Q3 2022 earnings briefing that “lower marketing program spend” was driven by an emphasis on “free and paid trial experiences”, and the company also noted that it benefited from “the streamlining of our commercial organization.” Shopify also reduced its full-year fiscal 2022 capital expenditures guidance from $200 million previously to the current $125 million.
The decline in sales and marketing expenses and the lower capital expenditures guidance send positive signals about Shopify’s focus on profitability. I hold the view that SHOP’s actual 2023 profit margins and earnings could exceed the analysts’ forecasts.
In the subsequent section, I touch on the 2023 financial outlook for Shopify.
What Is The Forecast For 2023?
2023 will be a much better year for Shopify going by the sell-side analysts’ financial projections.
SHOP is expected to witness a +21.3% increase in its revenue in 2023, which will represent a faster pace of growth as compared to the company’s forecasted 2022 top line expansion of +19.5% according to S&P Capital IQ. The sell-side also forecasts that Shopify will reverse from an estimated normalized net loss of -$75 million in FY 2022 to generate a positive normalized earnings of +$52 million for FY 2023.
As outlined in the previous section, Shopify’s GMV for Black Friday and Cyber Monday was pretty good, and there are indicators pointing to slower expense growth and lower capital expenditures for the company going forward. These factors provide support for the sell-side analysts’ view that SHOP will meet the market’s expectations at the very least, with the potential for positive surprises.
What Do Analysts Believe About Shopify?
Analysts in general believe that Shopify’s stock won’t rise in the near term. The consensus sell-side price target for SHOP is $40.00, which is just +4% higher than SHOP’s last traded share price of $38.38 as of December 9, 2022. Furthermore, less than half or only 19 of the 47 analysts covering SHOP’s shares have either a Buy or Strong Buy rating awarded to the stock. In contrast, most Wall Street analysts have a bullish bias, and the majority of sell-side ratings tend to be Buy calls.
In other words, the market has modest expectations about how Shopify’s shares will perform in the future. This means if SHOP does deliver above-expectations financial performance in the quarters and years ahead, the company’s shares are most probably going to benefit from a substantial re-rating.
Is SHOP Stock A Buy, Sell, Or Hold?
SHOP’s stock is a Buy. Investors’ expectations of Shopify are reasonably low as evidenced by the sell-side’s target prices and ratings. As such, Shopify’s shares have the potential to rise in a significant manner, if the company’s actual 2023 performance in areas such as GMV growth and profitability exceeds the analysts’ expectations.
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