Key Factors Pointing Towards a Bright Future for Shopify
3 Green Flags for Shopify's Future
Recent challenges are in the rearview mirror and Shopify is poised for continued growth. Few companies have been on wilder rides over the past few years than Shopify (NYSE: SHOP). Since early 2019, its stock has been as high as $169 and as low as $19 and today it trades for around $78. The pandemic-induced pull-forward of business to e-commerce companies and the ensuing correction played a large part in the stock's performance. Only recently are things beginning to normalize.
Accelerating growth in key areas
Shopify generates the majority of its revenue from its merchant solutions segment by charging fees for transactions that take place on the platform. In light of this, investors should keep an eye on two important metrics: gross merchandise volume (GMV) and gross payments volume (GPV). Gross merchandise volume is the total dollar value of orders processed on the Shopify platform. In the fourth quarter of 2023, Shopify reported GMV of $75 billion. This was a year-over-year increase of 23% and continued a trend of accelerating GMV growth.
- GMV:
- $50 billion - Q1 2023
- $55 billion - Q2 2023
- $56 billion - Q3 2023
- $75 billion - Q4 2023
- Year-over-year growth: 15% - Q1 2023, 17% - Q2 2023, 22% - Q3 2023, 23% - Q4 2023
The story is similar for GPV, which is the amount of GMV that is processed through Shopify's payments system. Shopify also collects a fee based on this dollar amount.
- GPV:
- $28 billion - Q1 2023
- $32 billion - Q2 2023
- $33 billion - Q3 2023
- $45 billion - Q4 2023
- Year-over-year growth: 25% - Q1 2023, 27% - Q2 2023, 31% - Q3 2023, 32% - Q4 2023
Top-line results are stronger than they appear
Shopify reported Q4 2023 revenue growth of 24%, which is consistent with the last several quarters. In its Q1 2024 guidance, the company noted it expects revenue growth to be in the low-20% range. However, there's a caveat to that guidance worth mentioning.
Controlling expenses and generating cash
Shopify reported operating expenses of $773 million in Q4, a result that was 22% lower than in Q4 2022. As a percentage of revenue, operating expenses were also lower year over year. Operating expenses represented 36% of revenue, down from 57% in the year-ago quarter. Much of this result was due to the aforementioned sale of the logistics business and also headcount reductions. Whatever the reason, this improved operating efficiency is a good sign.
An important aspect of Shopify's operating expenses is its stock-based compensation. The total amount of such compensation increased by 12% in fiscal 2023 but as a percentage of revenue, it dropped more than 1%. This helped contribute to a full-year 2023 free cash flow margin of 13%, up significantly from a negative free-cash-flow margin of 3% in 2022.
The bottom line for investors, Shopify plays an important role for thousands of businesses of all sizes. Now that the pandemic is receding, management is making smart decisions to improve profitability and generate cash. Its strong growth profile and improving operating efficiencies are bright signs for the future.
This article was prepared using information from open sources in accordance with the principles of Ethical Policy. The editorial team is not responsible for absolute accuracy, as it relies on data from the sources referenced.