Shopify’s unexpected losses in the third quarter
Shopify posted adjusted EPS of -$0.29 in the third quarter. However, analysts had been anticipating EPS of $0.11. In the previous year’s period, Shopify reported EPS of $0.05. The company’s losses came unexpectedly in the third quarter, as it had delivered significant earnings growth in the past. Its earnings fell 20% YoY (year-over-year) in the third quarter of 2018, but its earnings growth improved to 73% YoY in the fourth quarter. Its earnings rose another 125% YoY in the first quarter of 2019 and 600% in the second quarter.
The Canadian e-commerce giant incurred higher spending, which led to losses, in the third quarter. Notably, the company is increasingly investing in expanding its customer network. It’s also building new fulfillment centers across the country.
Shopify also incurred higher operating expenses in the third quarter. Its operating costs rose 39.4% YoY to $252.4 million in the period.
The company’s revenue beat analysts’ estimate of $383.8 million and rose 45% YoY to $390.6 million in the third quarter. Its revenue also exceeded its guided range of $377 million–$382 million. Its refreshed online checkout system and setup of a delivery system led to higher revenue in the third quarter. However, its YoY revenue growth rate of 45% was its slowest in the last four years. Notably, the company’s sales growth has remained sluggish for the past several quarters on a YoY basis.
Shopify focuses on fulfillment to take on Amazon
The company has been investing in fulfillment centers, which is attracting more merchants to its platform. Shopify now has over 1 million merchants around the world. Moreover, Shopify is now considered the second-most-popular online shopping destination after Amazon (AMZN).
In June, Shopify outlined a plan to spend $1 billion to set up several fulfillment centers in the US through 2023. The fulfillment centers will help merchants deliver products more easily and efficiently. Further, the company will be able to store products from different merchants in one place. The company will also be able to reduce costs for both sellers and buyers, which should boost its earnings.
With its fulfillment centers, Shopify will be able to better compete with e-commerce rivals such as Amazon, eBay (EBAY), and Walmart. Amazon also delivers at lower prices and encourages merchants to use their own warehouses and shipping tools.
Shopify’s recent $450 million acquisition of 6 River Systems is expected to help it compete directly with Amazon. The addition of 6 River Systems should help it move into the warehouse and logistics business. The purchase is also likely to ramp up the company’s plan to set up fulfillment centers in the US. Shopify expects the 6 River Systems acquisition to generate around $30 million in annual revenue in 2020.
Higher revenue guidance for 2019
Despite losses in the third quarter, the company has raised its revenue guidance for 2019, as it remains upbeat about its fulfillment centers. CNBC’s Mad Money host, Jim Cramer, also likes Shopify stock. Shopify now expects its revenue to grow to $1.55 billion–$1.56 billion in 2019. This revenue guidance is higher than its earlier guidance of $1.51 billion–$1.53 billion, which it raised in the second quarter. However, analysts expect lower revenue of $1.54 billion for the full year, up 43.7% YoY. Its revenue is likely to rise 35.3% YoY to $2.09 billion in 2020.
The company expects its revenue to rise to $472 million–$482 million in the fourth quarter. However, analysts expect lower fourth-quarter revenue of $470.6 million, up 36.9% YoY.
Wall Street expects Shopify to see EPS growth of 4.72% YoY to $0.27 in the fourth quarter. They also expect its EPS to rise 62.5% to $0.62 in 2019 and 55.0% YoY in 2020.
Among the 29 analysts covering SHOP, 16 have “buy” ratings on the stock—unchanged from last month. About 11 analysts have “hold” ratings on the stock—also unchanged. Only two analysts have “sell” ratings on the stock—up from one last month.
Shopify’s stock price movement
Shopify stock rose 2.4% on October 28 and closed at $324.93. At this closing price, Shopify’s market cap was about $34.4 billion. The market caps of rivals Amazon and eBay were $874.6 billion and $29.4 billion, respectively.
Shopify stock is trading 20.7% below the 52-week high of $409.61 it hit in August. The stock is also trading about 176.2% above its 52-week low of $117.64. It’s gained 134.7% so far this year. Many hedge fund managers and institutional investors are also getting bullish on the stock.