Shopify's Revenue Growth Outpaces Estimates, But PayPal-Related Margin Impact Raises Questions: Analyst

JP Morgan analyst Reginald L. Smith maintained an Overweight rating on Shopify Inc SHOP after the company released its quarterly print Tuesday.

Fourth-quarter revenue increased 31% versus Smith’s 26% and the Street’s 27% estimates, driven by a 7 pt acceleration in Merchant Solutions (primarily payments) revenue.

Gross margin contracted ~150bps from the prior year to 48.1%, a touch below Smith and the Street estimates (impacted by PayPal Holdings PYPL revenue recognition change).

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GAAP operating expenses increased 15% to $887 million (32% of revenue), consistent with Smith and Street expectations of $879 million and $895 million and prior guidance (32%-33% of revenue).

The free cash flow margin of 21.7% was ~170bps ahead of Smith and Street’s guidance of 21%.

GMV increased 26%, consistent with a broader acceleration in payment volume. Total MRR of $178 million came below Smith and the Street’s $181 million and $182 million.

The attach rate was 2.98%, up 13bps, and ahead of Smith’s 2.91% and Street’s 2.94% estimates. The first-quarter guidance was solid but insufficient to support the current valuation.

Shopify guided to mid-20% revenue growth compared to Smith and Street’s 25% and low-20% gross profit growth versus Smith’s 24% and Street’s 23%.

That said, the guidance calls for low double-digit operating expense growth (about consistent with recent trends) and mid-teens free cash flow margin against Smith and Street’s 18%, which was towards the low end of investor expectations of ~20%.

Ultimately, guidance points to stability next quarter, which is reasonable considering Shopify delivers premium growth and solid profitability. However, Smith noted the expectations were for further free cash flow margin expansion or more substantial gross profit growth to justify the investment in operating expenses.  

SHOP Price Action: Shopify stock is up 2.41% at $122.79 at the last check on Tuesday.

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