Shopify (NASDAQ:SHOP), the e-commerce figure that helped save shopping in the pandemic, turned in one magnificent earnings report, in which it thoroughly destroyed expectations in earnings and revenue. Shares spiked 11.4% in trading on Wednesday and delivered not only terrific earnings for the previous quarter, but also signs that a post-pandemic return to stores won't put e-commerce on the shelf.
Shopify's Earnings Report Trounced Expectations and its Own Past
Shopify news today delivered not only beats on expectations, but also a clear demonstration that the company is on the rise. Shopify turned in adjusted earnings per share (EPS) of $2.01, which beat the consensus estimate of $0.75 per share nearly three times over.
Shopify also posted revenue of $988.6 million for the first quarter of 2021, which is not only a consensus-beater—consensus came in at $862.7 million—but also a clear win over its own past. Shopify's $988.6 million quarter beat the first quarter of 2020 by 110%.
It wasn't strictly sales that drove the company to such heights; Shopify's investment in Affirm—an online payments company—delivered an unrealized gain of $1.3 billion. Shopify's connection to Affirm gives Shopify over 20 million shares of Affirm, and Affirm's gains in the meantime meant more gains for Shopify.
Do Analysts Expect Shopify To Keep Its Gains Going?
It's dishonest to say there aren't limiting factors ahead for Shopify; reopening stores will certainly reduce online shopping, and many stores that already have set up Shopify systems won't be back to do it again. Financial analysts, though, aren't fazed, and expect the Shopify train to keep right on rolling.
How can we tell? Look at the analyst perspective over time; a year ago, the company had 12 “buy” ratings, 15 “hold”, and two “sell” ratings to its credit. Today, we're at 18 “buy”, 15 “hold” and one “sell.” Buying recommendations are up around 50%, while that same amount was lost from the “sell” side.
A reasonable case can be made for “hold” assessments—the company pays no dividend, shows no sign of planning to do so, and already trades around $1,280 per share—but a look at price targets shows why there's still so much “buy” recommendation in play. The average price target is currently $1,360 per share, with a high of $1,900 and a low of $830. Even the average price target represents growth potential, and in a four-figure stock, that's a big deal. In the last two days alone, four out of five analysts have raised their price targets on Shopify; each hasn't raised much—Morgan Stanley, the latest, went from $1,300 to $1,400—but all four held targets that were higher than the last close price and are now higher still.
Three Reasons Why Shopify Can Keep Growing
We know that Shopify knocked expectations out of the park. We know that the analysts are on board. There are three more major reasons why Shopify can keep going, even as stores start to reopen and vaccination take-up rates turn the specter of Covid-19 into a shade of what it was.
Customer Inertia. People can go back to stores, yes, absolutely. Mayor Bill de Blasio earlier today announced plans to have New York City completely reopen—completely, with no capacity limits—by July 1. That's going to limit future growth for Shopify, who no longer serves as the only real option to get customers buying. However, customers were already increasing their online spend for years before Covid-19, and there's no reason to believe they won't continue shopping online. The amounts may reduce, but the chunk of the market that wants to make shopping as easy as pressing a few buttons and waiting a couple days will not go away.
One Monster War Chest. We noted earlier Shopify isn't planning to release a dividend. Not great for investors, but the “why” of it is consolation. Shopify instead plans to put that profit back into the business, and it's got a lot of profit to put back. Reports note Shopify has about $7.87 billion in cash on its balance sheet, and that means a lot of opportunity. It already did well picking up Affirm, so another complementary good couldn't hurt. Some are even looking for a major acquisition, and if Shopify can continue to improve its processes, that's a win that should drive more price gains.
Improved Processes. The company has already seen gross merchandise value going through its systems nearly double thanks to the rush into ecommerce. While that's likely to fall off with the reopening of physical retail, Shopify is taking steps to limit that impact. It's building its own distribution network, reports note, to handle warehousing functions and shipping for its users. That should make it even more valuable, and even with a decline in online shopping from just having other options, the losses should be reduced accordingly.
With analysts backing it up, a killer earnings report, and a clear path forward, there's little reason not to consider getting some Shopify in your portfolio. Much of the company's growth may be passed, but there's still room for more.
