Shopify Earnings: Merchants flocking to the platform in…

• Morningstar rating: 3 stars
• Estimated fair value: $110
• Economic ditch: Lat
• Morningstar Uncertainty Rating: Very High

What we thought about Shopify’s earnings

The stock has rallied on these positive results, but we still see upside based primarily on higher near-term upside contained in our new fair value estimate. Unlike the past two quarters, management has delivered on cost containment and strong margins. We continue to believe that Shopify is well positioned as an e-commerce leader and has a variety of irons in the fire to support sustainable growth.

We’re impressed with the strength of earnings in the quarter and have moved our estimates higher over the next few years. We believe this reflects the success of dynamic marketing investments and the company’s growing leadership position. Second-quarter revenue rose 21% year-over-year to $2.045 billion, beating our expectations. Adjusting for the sale of the logistics business, revenue was up 25% year over year. Compared to the prior-year period, subscription revenue grew 27% year-over-year, while merchant solutions grew 19%. Subscriptions were considerably stronger than we anticipated, while merchant solutions were on track. Overall revenue strength was driven by a combination of growth and continued merchant performance; the impact of rising prices; adoption of merchant solution products such as payments; power in Europe; and offline performance.

In our view, Shopify should build on its success in attracting larger brands to the platform, especially given the rash of recently released features and products, including Markets Pro, Shopify Magic, and Commerce Components. Gross merchandise volume, or GMV, increased 22% year-over-year to $67.2 billion, while gross payment volume processed through Shopify Payments was $41.1 billion, or 61% of GMV.

Shopify’s quarterly performance is impressive

Enterprise customers are increasingly adopting Shopify Payments, which is not something we would have expected a few years ago. We calculate an attachment rate of 3.04%, up from 3.08% a year ago. Despite the slight decline, we believe it should continue to grow over time as more merchant solutions are adopted. Monthly recurring revenue was $169 million, up 25% year over year.

Despite our expectations for expanding margins, Shopify’s performance this quarter is impressive. After continuing to expand marketing spending over the past two quarters, management delivered a greater balance between growth and margins. Still, the marketing efforts appear to be paying early dividends, even though most of the recent spending is likely to show up in 2025 revenue. In the second quarter, non-GAAP operating margin was 14.6%, compared to 8 .6% negative a year ago. We see margin strength in the quarter as a result of better revenues, more measured investments, the impact of price increases and the disposition of the logistics business. Free cash flow was again just as impressive.

Third quarter guidance was significantly better for both growth and profitability than we expected. Not only does this quarter’s strong performance and good guidance lead us to raise estimates, but it also provides direct evidence that recent marketing efforts have provided at least a modest boost to demand earlier than anticipated. We also believe that the company’s robust platform attracts new traders.

Third-quarter guidance included year-over-year revenue growth in the low to mid-20% range and operating expenses between 41% and 42% of revenue, both of which were several hundred basis points better than we expected . Management also believes that macro conditions remain unchanged. On that last point, management noted that it sees the same headlines that investors do, but believes that the company’s large and diverse merchant base (in terms of size, industry and geography) has helped drive strong growth.