What Should Investors Know Ahead of Shopify's Earnings?

· Shopify's Q1 earnings report highlighted a significant 23% increase in revenue, mainly attributed to gains in their Merchant Solutions Business, bolstered by the growth in Gross Merchandise Volume (GMV). This growth resulted from robust sales from established merchants and the onboarding of new clients, particularly from the enterprise segment. At the same time, the quarter saw an increase in the penetration of Gross Payments Volume (GPV) within GMV. The size of GPV directly reflects the scale and usage rate of the Shopify Payments service, such as capital solutions, installment plans, and Shop Pay. An increase in GPV directly boosts the revenue Shopify derives from its payment processing services.

· Shopify Inc. is recalibrating its focus to attract large enterprise clients, a notable pivot from its traditional emphasis on empowering smaller businesses. The firm is honing its platform to cater to the needs of larger companies making the leap into e-commerce, implementing enhanced checkout features, pricing options for international markets, and the ability to handle increased sales volumes. This shift is designed to appeal to corporations that are ready to modernize their digital infrastructure. By targeting larger clients, including those in the business-to-business and global sectors, Shopify aims to counteract the ongoing economic challenges faced by its small and medium-sized business customers, thereby paving the way for more reliable long-term growth. Such strategic reorientation is expected to bolster the role of Shopify Plus, the company's high-end subscription offering, within its revenue model. With Shopify Plus accounting for 31.8% of the company's recurring monthly revenue in Q1 FY24 and forecasts suggesting a marginal rise to 31.9% in Q2, its growing contribution is becoming an increasingly vital indicator of Shopify's penetration and performance in the enterprise market.

Investors' focus should extend beyond whether Shopify will outperform its Q2 projections to the forward-looking statements and outlook shared by the management for the forthcoming year. Special emphasis might be placed on the development trends of GMV and GPV, the company's strides in the B2B and enterprise domains, and the role that Subscription revenue plays, with a spotlight on Shopify Plus.

GMV growth: The focus will be on management’s commentary regarding the performance of existing merchants, the integration of new ones, international expansion efforts, and the speed at which B2B and enterprise brands are embracing Shopify.

Merchant Solutions Revenue: Forecasted to rise by 19.89% year-over-year, Merchant Solutions Revenue is the dominant force in revenue generation. This projected increase is deeply associated with GMV enhancement, the effective market penetration of Shopify Payments, and the acceptance of both existing and emerging product lines. An increase in revenue from Merchant Solutions will signal the platform's success in supporting the growth and scaling of merchant businesses.

Subscription Solutions Revenue: Accounting for 27% of total revenue, this segment is growing, particularly as Shopify targets the B2B and enterprise customer segments with its Plus subscription plan. An increased share of Shopify Plus within the Monthly Recurring Revenue would demonstrate the company’s success in acquiring and retaining enterprise customers, giving investors the required confidence in the company’s go-to-market strategy.

Profitability: Management has projected a 50 basis point reduction in gross margins for Q2, attributed mainly to the increased share of the lower-margin Merchant Solutions business and operational costs, which make up 45–46% of total revenue. Investors' confidence is likely to rise if the recent pricing revisions made to the Standard and Plus subscription plans prove to be margin-accretive.

Even though Shopify's shares have stumbled this year, recent analyst opinions hint that the current market price might be too gloomy. The new target price from Piper Sandler and the upgraded outlook from BofA reflect a growing confidence in Shopify's financial direction and its pivot towards sustainable growth and improved profit margins.

Piper Sandler has upped its target for Shopify to $67, maintaining a Neutral stance. The firm's upgrade is partly based on stronger-than-expected Shop Pay Gross Payment Volume (GPV), which saw nearly a 50% year-over-year increase in Q2, possibly accounting for 40% of total GPV, or more than $16 billion in transactions. If Piper Sandler's assessment is accurate, Shop Pay's expansion is promising and could signify a 45% growth year-over-year if it continues as projected.

Additionally, BofA's Brad Sills has raised his rating for Shopify from Neutral to Buy, raising the target price to $82 from $78. Sills notes that with the arrival of new CFO Jeff Hoffmeister, Shopify seems to be realigning towards a strategy that balances revenue growth and margin improvement. Sills projects robust revenue growth and free cash flow generation for Shopify, supported by a strong baseline in e-commerce growth, consistent market share gains, and controlled expenses.