Black Friday and Cyber Monday e-commerce sales broke records again this year, with Adobe pointing out that US sales increased 10.2% YoY to $10.8 billion on Black Friday while Cyber Monday sales rose 7.3% YoY to ~$13.3 billion. Peak sales hit $15.8 million per minute on Monday evening.
Shopify is a major beneficiary of Black Friday sales, and coming off a strong Q3, saw another record-breaking holiday. Shopify’s growth was quite strong at two times higher than overall Black Friday sales, with GMV increasing 22% YoY to a record $5 billion. For Black Friday/Cyber Monday, GMV rose 24% YoY to $11.5 billion with peak sales hitting $4.6 million per minute.
Q3 was strong with revenue growth accelerating to 26% YoY, operating income more than doubling YoY and FCF margin approaching 20%, the true test will be Q4. Shopify will need to prove to the Street that it can continue to re-accelerate revenue into 2025 given the strong Black Friday trends and international expansion efforts.
Shopify Revenue Growth Reaccelerates in Q3
Shopify reported a strong third quarter earlier in November, with revenue growth reaccelerating more than 500 bp sequentially. Q3 revenue increased 26.1% YoY to $2.16 billion, with growth accelerating from 20.7% in Q2. Excluding logistics (comps from Q2 23 to Q2 24), Q3 was the sixth consecutive quarter with revenue growth of >25%.
For Q4, management guided revenue growth in the mid- to high-20% range, benefiting from the holiday season and building upon Q3’s growth. Given the recent data on Black Friday sales, Shopify is well on its way to deliver on this guide.
Shopify pointed out three key drivers of revenue growth and strength in Q3:
· Strong GMV growth
· Subscription Solutions revenue growth
· Increased Payments penetration
I break these key points down for you below.
GMV Driven by European Growth of 35%
International helped to drive the beat this quarter, with GMV “outside North America growing 33% in Q3. European GMV grew greater than 35% as our largest markets of the UK, Germany, France, and the Netherlands continue to gain traction.”
Global GMV increased 24% to $69.7 billion in the third quarter, the fifth quarter in a row where growth exceeded 20%. This was driven by same-store sales growth by Shopify and Shopify Plus merchants (organic growth from existing stores), as well as that international strength. Shopify Plus is tailored to large and enterprise businesses, offering exclusive conversion and automation features and lower fees to help drive growth for those merchants.
Additionally, Q3 offline GMV was up 27% YoY, and has more than doubled in just the past three years. Q3 B2B GMV grew over 145% YoY, and has now had five consecutive quarters of triple-digit growth. This shows Shopify’s diversity ability to grow beyond digital stores for small-to-medium sized retail customers, which had driven the bulk of the business during the stock’s Covid surge. The expansion into Europe also shows promising signs of Shopify’s ability to scale globally in a more meaningful way. The company stated they “made enhancements to localization, shipping, and compliance, and are pairing that with intensified marketing efforts” for Europe.
Black Friday was also strong and an early indicator for Q4, with Shopify recording $5 billion in GMV for the holiday, a 22% YoY increase, in-line with last year’s growth. Deutsche Bank analysts noted that this GMV puts Shopify on track to hit Q4 GMV expectations of $92.8 billion, correlating to a 23.6% YoY increase, about in line with Q3’s growth rate.
To note, GMV growth of 24% lags revenue growth of 26%. This is not necessarily a negative; however, it does hint that customer spending could be slowing slightly, and a further decoupling of the two rates could suggest a revenue re-acceleration may be short-lived if this decoupling continues.
Subscriptions: MRR Accelerates 3-Points
Shopify’s Subscription Solutions revenue, the second stated driver of revenue growth, increased 26% YoY to $610 million, and represents 28% of revenue. Growth has decelerated from 34% YoY in Q1 and 27% YoY in Q2, but MRR trends point to growth stabilizing around 26% or reaccelerating slightly come Q4 and into 2025 with some pricing and merchant growth tailwinds.
In Q3, MRR growth accelerated 3 points to 28% YoY, up from 25% in Q2, reaching $175 million. Plus contributed 31% of MRR, flat with last quarter, while Plus, Standard and Point of Sale all saw “continued growth” in Q3.
Shopify Payments up 31%, Shop Pay up 42%
Shopify Payments facilitated $43 billion in GPV in Q3, up 31% YoY, with penetration rising to 62% of GMV (compared to 58% last year). Shop Pay similarly increased 42% YoY to $17B in GMV. Management attributed the strength in payments to a few factors: strong performance of merchants utilizing Payments, more of which are Plus subscribers, higher global adoption of payments; and increasing penetration of Shop Pay.
For Q4, Payments are likely to provide a headwind down the line, due to holiday season dynamics. In Q3, the lower margins on Payments came from a higher mix of Shopify Plus merchants, which are larger enterprises at a fixed rate, and due to a higher mix of credit card usage compared to debit card usage. Shopify explained that Q4 “sees a higher percentage of revenue from Payments given the high-volume holiday selling season,” and as a result, management expects “higher dollar losses on Payments” due to that volume growth.
Q4 Earnings Pop May be Short-Lived
Analysts are forecasting that Shopify regresses back towards revenue growth in the 20% range by FY25. Currently, Shopify is estimated to report 27.2% YoY growth in Q4, supported in part by 24% YoY growth in Cyber Week GMV. This would mark a sequential acceleration of 110 bp, and 360 bp faster growth than the 23.6% recorded last Q4.
Shopify’s revenue growth is more correlated to GMV growth now as opposed to 2022 and early 2023. For example, Shopify was reporting revenue growth rates >10 percentage points higher than GMV growth due to GPV growth, pricing and merchant revenue growth.
By Q4 2023, revenue growth became much more closely tied to GMV – Shopify reported 23.2% GMV growth in that quarter and 23.6% revenue growth, and in Q1 2024, GMV growth was 22.8% versus revenue growth of 23.4%. However, Q3 showed a larger decoupling of the two, with GMV growth of 24.0% lagging revenue growth by more than 2 percentage points.
This suggests that if GMV growth begins to peak in Q4 and decelerate, revenue growth may soon follow if Shopify cannot push GPV growth to >30% or pull additional levers such as pricing to maintain a high-20% revenue growth rate.
To point out, analysts currently expect GMV growth of ~23.6% in Q4, again much slower than the 27.2% estimated revenue growth rate, though increased Payments volume will play a role in that. Moving into 2025, if GMV trends towards 20%, there’s risk that revenue growth will follow.
These are a few things that I’m watching for as I continue to evaluate Shopify. I provide weekly deep dives, real-time trade alerts and weekly webinars to evaluate positions and discuss potential entries and exits. Learn more here.
Executing Well with 132% Growth in Adjusted Operating Income
Shopify is executing very well despite margin headwinds, driving operating income growth well in the triple digits despite contracting gross margins in Q3.
Corporate gross margin contracted 90 bp, dropping from 52.6% last year to 51.7%, weighed down by Merchant Solutions (accounting for 55% of gross profit dollars), where gross margin contracted 130 bp to 39.7%. Management added that Payments had an adverse impact to Merchant Solutions’ gross margin for two reasons: it accounted for a larger portion of revenue, while it also had lower margins due to higher Plus merchant mix on a fixed rate and a higher credit card mix compared to debit cards.
Despite the headwinds to gross margin, Shopify’s cost optimization efforts are bearing fruit. Gross profit increased 24% YoY, or $217 million in dollar terms, while operating expenses increased just 7% YoY, or $56 million in dollar terms. This drove a 132% YoY increase in adjusted operating income from $122 million in $283 million, or 13.1% of revenue. This led to a 99% increase in adjusted net income, excluding equity investment impacts.
Q4 is expected to see this dynamic continue, despite more margin headwinds. Based on management’s guidance, gross margin is expected to contract 3.2% QoQ and 1.1% YoY while operating income is projected to increase 2.8% QoQ and increase 2.5% YoY.
Shopify Stock Has Potential Catalysts Ahead
Shopify has a couple catalysts ahead, one in moving upstream to capturing more enterprises on the platform, and the other within AI and automation features facilitating daily workflows for merchants.
In Q3, management highlighted that the quarter was “an exceptional quarter in terms of new enterprise-level brands” from all verticals coming to Shopify. Management said that enterprise “is a massive opportunity to build for the long term,” with the opportunity only beginning to bud, with just 16 enterprise launches in Q3.
Shopify believes it offers a value proposition for enterprises to switch to its platform due to flexibility and speed. To demonstrate this, management explained that “one merchant recently brought over 44,000 SKUs to Shopify in less than three minutes, a task that used to take hours if not days. This significant reduction in data migration hassle is a big deal as it removes major friction point for merchants looking to move to Shopify.” Migrating over more enterprise brands in the coming quarters can provide tailwinds to both GMV and GPV, bringing more sales and more payment transactions to the platform.
The data migration point ties hand in hand with another catalyst for Shopify, arising from AI and automation features. Shopify is working on improving merchant automation, from data migration to inventory management and more. Shopify Flow, which is Shopify’s low-code workflow automation app that empowers merchants to build custom automations has been improved with 304 new actions in the API. Shopify Inbox is now utilizing AI to assist merchants in quickly responding to customer inquiries, while new automations for tax filings and VAT were added to Shopify Tax.
Shopify is also implementing artificial intelligence to drive higher levels of personalization for customers, and in turn, drive higher value for merchants. President Harley Finkelstein explained Shopify thinks “search and AI together makes the Shop search way more relevant, way more personalized,” and that “the change that we’ve made, in some cases, have led to an 18% increase in sessions where a buyer engages in a recommendation with our new home feed.”
To that extent, Shopify announced that Mikhail Parakhin recently joined as CTO, after spending more than a decade at Microsoft helping to launch Copilot and spearheading search and AI innovations at Yandex. Shopify said that Parakhin “brings a wealth of experience in AI and search technologies” and “in just over two months since he joined us, he has already made a significant impact enhancing our products.”
Technical Analysis:
As long as any weakness can hold $89.95, I expect the uptrend to push into the $132 region and then the $150 – $190 region. If any further weakness cannot hold $89.95, then the odds SHOP will push higher go down significantly. It is well above this level, so we should continue to look higher.
Once it gets to the $132 – $190 region, what next? This is where SHOP gets a little tricky. The larger uptrend off the 2022 low has unfortunately been quite messy. This opens the door to several potential larger patterns in play. What my firm can say with a higher degree of confidence is that if SHOP can break above the $190 region and do so on elevated volume and in a direct manner, it will favor the more bullish interpretation of what is potentially playing out.
However, if it fails to breakout over the $190 region, and instead see a larger pullback from the $150 – $190 region, then we will likely see a notable correction before pushing higher. We really will not know what is in play from a technical analysis perspective until we get into the above target range and see what SHOP’s price does next.
Conclusion
Shopify has performed well despite gross margin headwinds, as prudent cost optimization efforts are leading to significant operating leverage. Q3 demonstrated this with triple digit operating income growth despite gross margin contracting nearly 1 percentage point. Although this dynamic along with strong growth is expected to continue into next quarter, ideally I’d want to see GMV keep pace with revenue growth into 2025.
Analysts seem to agree with next year consensus showing growth exiting next year at 21.2%. Although the near-term catalyst is strong Black Friday performance, likely leading to strong holiday performance (we will see), the medium-term catalysts are found in global expansion, increased enterprise mix, and placing more focus on AI and automation features to help merchants increase productivity and drive more sales.
Stay on the leading edge of AI with I/O Fund’s high-performing tech portfolio, which had 7 positions outperform the Nasdaq-100 last year for a cumulative return of 131% since inception. Year-to-date for 2024, the I/O Fund had 10 positions beating the indexes, many held at high allocations, and we are prepping for a strong 2025. Take advantage of our Black Friday sale, our largest sale of the year with up to $250 off! Learn more here.
If you would like notifications when my new articles are published, please hit the button below to “Follow” me.
