Shopify Inc. reported fourth quarter earnings on Tuesday that showed strong revenue growth but a weaker than expected profit outlook, which two experts say the company should get a pass for considering its impressive performance of late.
“The revenue growth is phenomenal. This is one of the very few companies that’s still growing more than 30 per cent and just guided for growth at least in the mid to high twenties,” Gil Luria, senior software analyst at D.A. Davidson, told BNN Bloomberg in a Tuesday interview.
“There’s a little bit more of an understanding and patience for free cash flow guidance being slightly less than expectations. Having said that, cash flow margins will be up year over year and overall margins this year should be at the least flat.”
On Tuesday, the Ottawa-based e-commerce giant reported fourth-quarter net income of US$1.29 billion, up from $657 million a year ago, as revenue rose more than 30 per cent, exceeding expectations.
Shopify said quarterly revenue totalled $2.81 billion, up from $2.14 billion in the last three months of 2023, but the company expects gross profit dollars to grow at a low-twenties percentage rate in the current quarter, weaker than expected.
Shopify shares were up around one per cent Tuesday afternoon after falling more than two per cent in early trading.
Ken Wong, managing director of software research at Oppenheimer & Co., told BNN Bloomberg in a Tuesday interview that despite the lower cash flow guidance that seemed to disappoint some investors, Shopify’s most recent quarter was “exceptionally strong.”
“I think the market reaction you’re seeing today is just kind of offsetting KPIs (key performance indicators), you have stronger revenues in Q4, you had deceleration in Q1 and then commentary that margins should be flat-ish going into 2025,” he explained.
“But you balance that with what we felt was an exceptionally strong Q4, and what is probably conservatism in Q1, so we’re actually willing to give management a pass on what we felt was a slight downtick in what expectations were for the first quarter.”
‘It makes sense to reinvest’
Luria said that with Shopify’s high growth rate, the company can afford to reinvest more cash into its business, which will improve profitability down the line, even if it takes a hit in the short term.
“A company that’s growing this fast is so rare right now that investors will give it a pass on margins, and these are good margins… if you can keep growing in the mid to high twenties, that is very rare air,” he said.
Wong said that he recently had a conversation with Shopify’s head of investor relations to get a better sense of the company’s current direction.
“The takeaway from the conversation was that the momentum was extending through the fourth quarter, keep in mind that there’s been a lot of progress made on the profitability side, and as we look to 2025, management has struck the right balance between growth and margins,” he said.
“And there’s so many large opportunities whether it’s enterprise, international, offline... that it makes sense to start to reinvest some of those gains back into the business to sustain a 20 per cent plus growth rate.”
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When it comes to Shopify’s long-term outlook, Luria said its “ramp is long” considering the ongoing shift of both customers and merchants to online platforms.
“This shift to e-commerce that’s been happening for decades will happen for decades longer. Shopify is a share gainer, and they’ve found additional growth engines,” he said.
“They’re growing upmarket, they’re growing B2B (business-to-business), they’re growing offline, they’re using AI (artificial intelligence) to get a premium product out there, so Shopify has plenty of growth engines and this long-term secular trend.”
With files from Bloomberg News
