Despite executing a 10-for-1 stock split in June, Shopify (NYSE:SHOP) shares have not increased in value. Furthermore, the business warned of inflation and interest rate headwinds, which are projected to weigh on consumer spending and e-commerce sales. And while Shopify has stated that it would lay off 10% of its workers due to rising revenue issues in the e-Commerce business, the firm has established itself over time as an innovative company with excellent market instincts. For these reasons, I continue to support Shopify and feel the e-commerce firm has tremendous long-term potential!
Why Shopify is a long-term buy: Growth in Merchant Solutions and annual cohort spending
Due to a slowdown in its primary e-Commerce operation, Shopify missed profitability and top-line projections for the second quarter. Shopify’s sales increased 16% year over year to $1.3B in Q2’22, down from 57% year over year growth in the previous period. With the COVID-19 epidemic no longer providing tailwinds, Shopify’s top-line growth rate has slowed significantly, with a higher USD exacerbating the company’s woes.
Subscription Solutions at Shopify increased 10% year over year to $366.4M, mainly owing to a rise in the number of merchants on the Shopify platform. The 10% growth rate in Subscription revenue was a reduction from the 70% growth rate reached in Q2’21. Still, growth was primarily restrained because Shopify has made themes and apps accessible to merchants at no cost until they hit $1 million in annual revenue. This adjustment was not in effect the previous year.
Despite an expected downturn in post-pandemic e-Commerce sales, Shopify will continue to expand. Because of its vast merchant base, the e-Commerce company retains a lot of influence in the industry, and rising product acceptance in the Merchant Solution area is positive.
The Merchant Solutions division is where the action happens and where Shopify can impact the future. Revenues in the segment increased 18% year on year to $928.6M, mainly to increased customer adoption of merchant-focused add-on services such as Shopify Payments, Shopify Shipping, and Shopify Markets as increased gross merchandise volume/GMV. Shopify’s massive merchant network provides significant power in product upselling, which might be critical in tapping into new income sources in the future.
The number of new merchants joining the Shopify platform and current merchants embracing key merchant solutions such as Shopify Payments or Shopify Capital influence gross merchandise volume. These merchant-focused solutions are tools that assist small companies in growing and increasing shop conversions… resulting in a bigger number of orders handled in the Shopify ecosystem. Shopify set an all-time GMV high of $46.9B in Q2’22, representing an 11% year-over-year increase.
The yearly customer cohorts of Shopify are generating internal revenue growth for the e-Commerce firm, which means merchants are increasing their spending on Shopify’s products and services over time. This is mainly because Shopify has introduced new products such as Shopify Payments, Shopify Capital, and Shopify Markets, which meet the critical needs of small businesses.
Customer demand for merchant-centric products is increasing, as seen by the increasing yearly product expenditure of Shopify’s annual customer cohorts. Shopify Payments offers payment processing solutions, whilst Shopify Capital provides short-term business loans to merchants frequently struggling to support their expanding but untested e-Commerce enterprises. Shopify Markets, which provides merchants with cross-border management solutions to make selling in multiple countries easier, is another intriguing feature.
Shopify retains a lot of potential for growth
Revenue projections for Shopify fell further with the release of the company’s Q2’22 results statement. The top line may face further revenue challenges due to inflation and increasing interest rates, hurting e-Commerce spending. However, Shopify is predicted to grow further: the e-commerce company’s revenues are expected to increase 19% in FY 2022 and 26% in FY 2023.
Shopify is selling at a 7.3X P-S ratio, which is substantially lower than it used to be, based on revenues of $6.9B (estimated for FY 2023). There is a significant chance that the company’s revenues will continue to consolidate for an extended period, particularly if the US economy enters a recession. However, Shopify is a solid bet on the e-Commerce industry’s rapid development in the long run.
Risks with Shopify
Shopify is an e-Commerce industry leader: it controls the merchant online store market. It is a reliable partner for merchants. Shopify has been rated chiefly on its potential for e-Commerce industry expansion and top-line growth. On the other hand, slow top-line growth is a significant commercial risk for Shopify and even more so for the company’s stock. Thus a slowdown will affect how investors perceive the company. A drop in GMV growth and sales might result in a reduced value factor applied to Shopify’s shares.
Final thoughts
Although Shopify’s growth is slowing, the firm’s increasing merchant base and better consumer monetization are two compelling reasons to invest in the company.
Rising product adoption and yearly cohort spending increase should boost Shopify’s revenue growth in the future, supporting the company’s potential for upside revaluation. While Shopify has yet to produce a post-split comeback, the company is poised for a long-term recovery!
Featured Image : Megapixl © Burdun
