Categories Analysis, Retail

Shopify (SHOP) set to cash in on Covid-driven uptick in e-commerce adoption

The company will take the necessary actions to manage costs in the event of a recession

This earnings season, the market witnessed the unique trend of internet-based service providers performing far better than their non-tech counterparts, which can be linked to the shutdown caused by coronavirus. E-commerce firm Shopify (NYSE: SHOP) registered strong subscription growth in the first quarter as people switched to online shopping en masse and merchants moved to online platforms to sell their products.

Shares of the Ottawa-based firm reached a record high on Wednesday, after the market responded positively to its stronger-than-expected first-quarter results. Earlier, analysts had recommend holding the stock, which looks over-valued at the current price. The consensus price target represents a 32% decline.

Cautious View

The stakeholders would be eager to know the impact of Covid-19 on Shopify’s business going forward. Referring to the market uncertainties, COO Harley Finkelstein at the earnings conference call said, “This shot to the economy was so sudden that patterns in merchant April may not be predictive of the rest of the year. However, we do have reason to believe that some of the patterns that emerge will continue… Merchants will continue to need our help and we plan to continue our efforts to innovate and develop more impactful ways to support them.”

Steady Growth

Of late, Shopify has been expanding market share steadily and is next only to e-commerce giant Amazon (AMZN). It has achieved double-digit annual revenue growth consistently after going public five years ago. In a way, the pandemic-related shutdown has come as a blessing in disguise for the company as traditional merchants are turning to e-commerce sites to remain in business.

Shopify’s spokesperson told AlphaStreet that it is seeing strong interest among established retail merchants to shift store-based sales to online. In the current quarter, new store creations are expected to increase, aided by the extended free trial being offered by the company.

Also, larger merchants are seeking to explore the direct-to-customer model, but are delaying their decisions due to the uncertain economic environment.

Revenue Up 47%

In the first quarter, adjusted earnings more than doubled to $0.19 per share, aided by a 47% surge in revenues to $470 million even as the number of merchants using the various Shopify services rose steadily. Encouragingly, Shopify Plus increased its contribution to total monthly recurring revenue as merchant sales remained elevated throughout the quarter. Last month, the company had withdrawn the financial guidance it issued earlier, citing the volatile market conditions.

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Meanwhile, the bottom-line performance, on an unadjusted basis, was impacted by costs related to the acquisition of 6 River Systems, which is likely to prompt the management to consider adopting cost-reduction measures in the coming quarters. The Shopify brand campaign has already been scrapped to make funds available for initiatives of higher priority.

In an email interaction with AlphaStreet, the company said it would take additional actions to ensure effective cost management in the event of an extended recession. Going forward, it expects to leverage the “merchant-first” business model and debt-free balance sheet to overcome the challenges.

Growth Initiatives

Interestingly, Shopify is continuing with its innovation plan and launched a slew of products, including mobile shopping app Shop and order tracking tool Arrive, in recent weeks. Also, plans are afoot to continue investing in expansion initiatives so as to stay relevant in the rapidly evolving e-commerce space.

Recently, the company joined hands with Facebook’s cryptocurrency Libra Association to build what it calls a payment network that would make access to money easier for merchants and consumers.

When it comes to future performance, the management’s view is that pros outweigh the cons – despite the uncertainty – which leaves the company well prepared to deal with the emerging economic scenario.

“We expect new norms and trends will benefit Shopify under different economic scenarios. And there is also what I call the multis will likely help us. We’re multi-channel, we’re multi-vertical and we’re in multiple geographies. Those are all playing to our benefit. Also, the diversity of our merchant base has been helping and will continue to help.”

Amy Shapero, chief financial officer of Shopify

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Statistics show that e-commerce sales in the US grew at a notably faster pace in the early months of 2020, compared to last year.  

Shopify shares made a surprise recovery after falling to a five-year low in March and climbed to a record high this week – an achievement probably no other Wall Street firm can claim these days. The stock has gained about 75% so far this year and crossed the $700-mark for the first time. Last year, Shopify had an outstanding performance in terms of market value growth and set records regularly.

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