Shopify 22Q2 Preview: Expectations may be more pessimistic

Shopify's recent sales growth is likely to remain subdued, along with a slowdown in economic activity due to the recent rise in inflation. Higher gas prices could mean less online spending for Shopify's merchant base, especially since it has a different value proposition compared to Amazon.com.

Bloomberg expects 2Q non-GAAP operating margins to compress by about 20 percentage points due to slower growth and higher R&D, sales, and marketing expenses. Amid increased uncertainty over consumer spending, 2H's management will scale back these expenses, and overall growth is expected to improve in 2023.

Shopify Fulfillment Network (SFN) is the new business in which Shopify invests greatly, mainly in integrating the network into larger facilities. Shopify will operate more locations themselves, and they will unify their warehouse management software. They hope to be able to serve over 90% of the US population in 2 days or less. Chief Financial Officer Shapero revealed that capital expenditures associated with the Shopify Fulfillment Network will begin to increase in 2022 and are expected to be approximately $1 billion in 2023 and 2024 for self-owned leased warehouse centers in key U.S. regions.

Barclays believes it is difficult to get too excited about the store's fulfillment in the U.S. in the context of slowing e-commerce growth and a looming recession. SHOP's message that it is committed to reducing profitability to invest in future growth does amount to a pause in the current market environment. SHOP has communicated its intent to make significant investments through P&L and capital expenditures to support its future growth ambitions, aiming to reinvest all gross profits into the business. Non-GAAP OI was up slightly in Q1 2022 and SHOP intends to increase spending further. Once the Delivery acquisition is completed, Barclays expects non-GAAP OI could become negative within a few quarters.

SHOP provided some directional commentary on revenue growth this year, noting: 1. 1H revenue growth will be the lowest and 4Q the highest; 2. Commercial solutions will grow more than twice as much as subscription solutions; 3. GP growth will lag revenue growth, but should eventually be higher than full-year 1H revenue growth; and 4. All GPs are expected to reinvest in the business (which, in Barclays' interpretation implies a rough break-even non-GAAP OI). The firm also guided for capital expenditures ($200 million in FY 2022 and $1 billion in 2023-2024) and selected other metrics such as SBC ($800 million in FY 2022).

Barclays believes that shopping revenue growth in 2H is likely to accelerate as comparisons continue to moderate, but this is by no means a foregone conclusion given the continued softness in end-consumer demand. The degree of acceleration is also more important than the binary relationship of whether growth rates are rising. Fundamentally, SHOP is in a challenging position as its revenue growth slows and margins compress, a double whammy for what has historically been a high growth, high P/E stock.

Bloomberg's consensus estimates for Shopify 22Q2 are for revenue of $1.334 billion; adjusted net income of $31.493 million; and adjusted earnings per share of $0.028.