E-Commerce software platform Shopify (NYSE:SHOP) reported Q3 FY2023 results topping analysts' expectations, with revenue up 25.5% year on year to $1.71 billion. Turning to EPS, Shopify made a non-GAAP profit of $0.24 per share, improving from its loss of $0.02 per share in the same quarter last year.
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Shopify (SHOP) Q3 FY2023 Highlights:
- Revenue: $1.71 billion vs analyst estimates of $1.67 billion (2.64% beat)
- EPS (non-GAAP): $0.24 vs analyst estimates of $0.14 ($0.10 beat)
- Free Cash Flow of $276 million, up 185% from the previous quarter
- Gross Margin (GAAP): 52.6%, up from 48.5% in the same quarter last year
Originally created as an internal tool for a snowboarding company, Shopify (NYSE:SHOP) provides a software platform for building and operating e-commerce businesses.
E-commerce SoftwareWhile e-commerce has been around for over two decades and enjoyed meaningful growth, its overall penetration of retail still remains low. Only around $1 in every $5 spent on retail purchases comes from digital orders, leaving over 80% of the retail market still ripe for online disruption. It is these large swathes of the retail where e-commerce has not yet taken hold that drives the demand for various e-commerce software solutions.
Sales GrowthAs you can see below, Shopify's revenue growth has been strong over the last two years, growing from $1.12 billion in Q3 FY2021 to $1.71 billion this quarter.
This quarter, Shopify's quarterly revenue was once again up a very solid 25.5% year on year. However, its growth did slow down compared to last quarter as the company's revenue increased by just $20 million in Q3 compared to $186 million in Q2 2023. While we'd like to see revenue increase by a greater amount each quarter, a one-off fluctuation is usually not concerning.
Looking ahead, analysts covering the company were expecting sales to grow 17.9% over the next 12 months before the earnings results announcement.
ProfitabilityWhat makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Shopify's gross profit margin, an important metric measuring how much money there's left after paying for servers, licenses, technical support, and other necessary running expenses, was 52.6% in Q3.
That means that for every $1 in revenue the company had $0.53 left to spend on developing new products, sales and marketing, and general administrative overhead. While its gross margin has improved significantly since the previous quarter, Shopify's gross margin is still poor for a SaaS business. It's vital that the company continues to improve this key metric.
Key Takeaways from Shopify's Q3 Results Sporting a market capitalization of $62.7 billion, more than $4.92 billion in cash on hand, and positive free cash flow over the last 12 months, we believe that Shopify is attractively positioned to invest in growth.
We were impressed by Shopify's free cash flow generation this quarter, which beat analysts' estimates with flying colors ($276 million vs $193 million consensus). The company expects to bring in even more free cash flow next quarter, showing that the steps it took to unlock greater profitability earlier in the year are working. Its revenue also outperformed Wall Street's expectations, driven by better-than-expected gross merchandise volume and gross payments volume. We track these metrics because they show how much Shopify is increasing its reach, and based on these numbers, there's no doubt the company is growing its ecosystem. In terms of new products, Shopify launched the Retail Plan, which is designed to help brick-and-mortar retailers with payments and building a simple online presence. Overall, we think this was a really good quarter that should please shareholders. The stock is up 16.9% after reporting and currently trades at $57.07 per share.
The author has no position in any of the stocks mentioned in this report.
