Shopify Stock Soars 25% as Third Quarter Profits Double

Key points

• Shopify shares soared 25% on Tuesday, becoming one of the biggest moves on the market.

• The jump was driven by strong third-quarter earnings, which saw adjusted earnings double.

• Is Shopify Stock a Good Buy?

The e-commerce platform has had six consecutive quarters of 25% year-over-year revenue growth.

Shopify (NYSE: SHOP) saw the biggest move on Tuesday, soaring more than 25% on the day to approximately $113 per share.

The e-commerce platform generated $2.16 billion in revenue in the quarter, up 26% year over year and above analyst estimates of $2.11 billion. It was the sixth consecutive quarter with revenue growth of more than 25%.

Net income rose 15% to $828 million, but non-GAAP preferred adjusted earnings soared 99% to $344 million, or 64 cents per share. That beat estimates of 27 cents per share. Adjusted earnings exclude the impact of equity investments in third parties, which are neither relevant to business fundamentals nor indicative of operating earnings.

With today’s meteoric rise, Shopify stock is up roughly 53% year to date to around $113 per share.

GMV jumps 24%

The strong third-quarter earnings were driven by robust activity on its shopping platform, combined with solid expense management.

Specifically, Shopify saw a 24% increase in gross merchandise volume, or GMV, to $69.7 billion, which beat estimates of $67.5 billion. GMV represents the dollar value of orders facilitated through the Shopify platform. Additionally, its monthly recurring revenue (MRR), which is the number of merchants multiplied by the average monthly subscription plan fee, jumped 28% year-over-year to $175 million.

Overall, Shopify’s subscription solutions revenue rose 25% to $610 million in the quarter, while its merchant solutions arm saw revenue rise 26% to $1.55 billion, which outperformed estimates of 1.52 billion dollars.

Additionally, Shopify was able to keep expenses in check as they increased just 7% compared to the third quarter of 2023, with general and administrative expenses falling 17% to $114 million.

This allowed Shopify to increase its free cash flow by 52% to $421 million, as it earned in each of the first three quarters of this year. Free cash flow margin increased to 19%, from 16% in the same quarter last year. This is an important measure as it allows investment in both operations and future growth.

“The third quarter was outstanding, further establishing Shopify as a leader in driving commerce anywhere, anytime. Our unified commerce platform is becoming the preferred choice for merchants of all sizes,” said Harley Finkelstein, president of Shopify. “As the busiest shopping season of the year approaches for our merchants, they rely on Shopify to provide the tools, unmatched speed, and reliability to maximize their success.”

Is Shopify Stock a Good Buy?

Investors were not only impressed by the strong growth; They were also encouraged by Shopify’s fourth-quarter outlook.

The company anticipates another quarter of strong revenue growth, targeting a mid- to high-twenties percentage increase in revenue in the fourth quarter.

Gross profit, which rose 24% to $1.12 billion last quarter, is expected to see a similar growth rate in the fourth quarter, while operating expenses, as a percentage of revenue, rank 32nd. % to 33%. This would be down from the roughly 38% rate last quarter.

Shopify got some price target upgrades after its third-quarter results, including Evercore, which raised it by $45 to $125 per share. Additionally, Roth MKM raised the target to $135 per share. That would represent a 13% to 22% increase in the share price.

But ahead of its third-quarter earnings release, Shopify had an average target of $80 per share, which would suggest a 29% drop.

The concern is the P/E ratio, which has shot up to 98, with a forward P/E of 68. Although it has enjoyed robust and sustained growth, that seems a little too high and should be monitored.