Shopify shares soar on better-than-expected results and strong ...

Shopify Inc.’s shares leapt 26 per cent on the Toronto Stock Exchange after the company reported third-quarter earnings that topped analysts’ forecasts and projected better-than-expected results for the current quarter, the year’s busiest shopping season.

The Ottawa e-commerce company generated US$2.16-billion in revenue in its third quarter, up 26 per cent from last year and exceeding analyst consensus estimates for the seventh quarter in a row. Net income, excluding the impact of equity investments, nearly doubled to US$344-million, up from US$173-million.

Shopify provides e-commerce tools for businesses and is used in 175 countries.

Meanwhile, the company generated substantial liquidity with US$421-million in free cash flow, up from US$276-million last year. This is far above analyst consensus of US$364-million, according to Scotiabank analyst Kevin Krishnaratne.

For the next quarter, Shopify is expecting revenue growth in the mid-to-high 20-per-cent range, as well as the sixth quarter in a row of double-digit free cash flow (FCF) margin, according to Martin Toner, analyst at ATB Capital Markets. FCF margin is a metric of free cash flow as a percentage of revenue, and a measure of how efficiently the company turns sales into cash to spend on expanding.

“The Q3 results and guidance should give investors confidence that Shopify’s growth story is intact,” said Mr. Toner, calling the company’s revenue, free cash flow and guidance “impressive.”

Shares of Shopify reached $158.66 on the Toronto Stock Exchange as of 11:00 a.m. Tuesday, up 26.5 per cent, reaching the highest point since January, 2022. This is on top of a 15-per-cent share price gain in the five days leading up to the earnings, reflecting hopes that the company was once again reaching the momentum that propelled it to pandemic highs.

In a Tuesday morning call with analysts, chief financial officer Jeff Hoffmeister said revenue was boosted by larger-than-expected gross merchandise value (GMV), or the value of the sales made by merchants over the company’s various platforms. Third quarter GMV rose 24 per cent to US$69.7-billion, up from US$56-billion last year and beating analyst consensus by US$2-billion.

When asked if the company expects any headwinds following a new U.S. administration, Mr. Hoffmeister said the company did not hear anything in president-elect Donald Trump’s campaign that would “impact the overall state of new business formation and entrepreneurship.”

The fourth quarter is typically a busy one for the company, given the high volume of sales during Black Friday, Cyber Monday and over the holidays.

The company’s revenue was also helped by growth from subscriptions revenue and the number of merchants on the platform. Monthly recurring revenue, which the company earns from subscriptions and contracts, was up 28 per cent, meeting analyst expectations, according to Royal Bank of Canada analyst Paul Treiber.

Shopify president Harley Finkelstein told analysts the company’s merchants benefited from new artificial intelligence tools which helped merchants find new audiences and automate customer service, as well as the company’s rollout of tax filing tools. This quarter, the company rolled out new financial tools for merchants, including trials of new loan structures in the U.S.

He emphasized the growth of its international markets (in 2023, revenue from outside North America made up less than a third of the company’s overall revenue), as well as its continued reach into the enterprise-level segment. During the quarter, the number of merchants with multiple physical locations doubled, he said.

When asked by an analyst how the company was preparing for changes to online shopping behaviour, given the rise of commerce through social media, Mr. Finkelstein said the company was ready to meet customers where they are, referencing e-commerce partnerships with YouTube, TikTok, Instagram and Spotify.

The company’s operating expenses were US$835-million, up 7 per cent from last year, driven by higher employee compensation, and higher marketing spend than last year, although the company said it spent less on advertising than initially expected. Mr. Hoffmeister said the company was maintaining a flat headcount and “discipline” in its internal systems to keep costs down.

Although the company’s take rate - the amount it makes from its vendors’ sales - was slightly below analyst expectations, analysts expect improvement as the company expands into new geographic and sector markets.

“We believe SHOP is adding more GMV from international and Enterprise where it’s still early for monetization, suggesting more upside to come as its product set matures in these markets,” said Scotiabank’s Mr. Krishnaratne in a note to investors Tuesday morning.