OTTAWA — After a ride on the COVID-19 online-shopping rocket ship, Shopify’s growth is returning to pre-pandemic levels.
Though it continues to get bigger, the Ottawa-based commerce company missed market targets for the first time in a long time. It reported US$1.12 billion in revenue in the third quarter, up 46 per cent. Discounting its equity stakes in other firms, Shopify posted adjusted net income of US$102.8 million, or US$0.81 per share, under analysts’ consensus estimate of US$1.23, compiled by FactSet.
Shopify’s stock still rose nearly nine per cent in early Thursday afternoon trading.
Here’s a breakdown of the numbers that matter in Shopify’s third-quarter earnings:
The big number: Shoppers did US$41.8 billion worth of shopping at Shopify merchants between July and September, up 35 per cent year over year. That’s the lowest growth rate for gross merchandise volume (GMV) during the pandemic.
Why it happened: More consumers left the house in some of the company’s biggest markets, like the U.S., which was responsible for two-thirds of Shopify’s revenue last year. Across the border in July, “people just moved about more often and they spent on services, recreation, entertainment, or back shopping in stores,” Shopify CFO Amy Shapero said on a Thursday earnings call. But as workers returned to the office and kids to the classroom, online shopping numbers ticked back up in August and September. Those months also benefited from the company’s strategy of inserting itself into more IRL transactions around the world over the course of the pandemic, ramping up marketing for its revamped point-of-sale system and launching it in new markets.
Why it matters: A big chunk of Shopify’s revenues are tied to its clients’ sales. The company’s merchant-solutions business makes money from payment-processing commissions, shipping and fulfillment charges, and cash-advance fees. Merchant solutions brought in US$787.5 million last quarter, up 51 per cent from the same period in 2020. Shopify keeps rolling out new services that will increase its share of merchant sales. For example, online stores that use Markets, launched in September, to calculate duties and taxes for cross-border buyers or to convert foreign exchange, pay transaction fees; that revenue might otherwise have gone to a third-party plugin. As Shopify rolls out more such services to merchants and into new countries, its take rate will continue to edge upwards. But to earn those fees, it still needs its clients to sell as much as possible.
They told you so: Pre-pandemic, Shopify’s revenue during any given year tended to go up and to the right, with each quarter larger than the last. At the start of this year, however, it signalled 2021 might look a little different. Though the company no longer provides numerical guidance, Shapero noted on a February conference call that this year “the revenue spread may be more evenly distributed across the four quarters than it has been historically.” So far that has largely played out. While some Shopify watchers had predicted a slowdown—“Achieving Q3 revenue growth expectations … could be challenging given the slowdown in e-commerce web traffic,” wrote CIBC analyst Todd Coupland in a note last week—Thursday’s results still fell slightly short of their expectations.
What’s next: Holiday shoppers have always made the fourth quarter Shopify’s most lucrative, and the company anticipates that will stay true this year. But some analysts predict growth will continue to slow. “We see online shopping continuing to moderate” in the quarter, Coupland wrote, predicting GMV expansion of 30 per cent, which would be the lowest since the company’s May 2015 IPO. (That’s still happening on a much bigger base, however—Shapero noted on Thursday’s call that merchants have done more business in the first nine months of 2021 than all of last year.)
Global shipping backlogs and component shortages have most notably impacted big-ticket purchases like autos and appliances, but they’ve also trickled down to the consumer discretionary merchants that make up much of Shopify’s base. Inflation is also running hot in the U.S., Canada and Europe. “The challenges are, of course, real,” said Shopify CEO Tobi Lütke on Thursday’s earnings call. “There are pressures in [the] supply chain, there are increasing logistics costs and things like this. Inflation is harder for us to judge—there are probably some inflationary things going on.” The company said delays and cost increases for merchants could affect fourth-quarter business.
Being social: In recent months, Shopify has built links to let merchants sell via Spotify and TikTok, and pushed its Shop Pay checkout and payment feature out to Facebook and Google. Across its client base, online stores do by far the most business, trailed by real-world retail. But “while adoption of social commerce is still early, it is growing fast for Shopify,” president Harley Finkelstein said Thursday. Sales through those links “grew more than tenfold” year over year, and by “double-digits” over the previous quarter.
In many Asian markets, companies like Gojek, Grab, Line, Paytm and WeChat have grown into so-called “superapps,” starting with chat, ride hailing or payments, then over time building out more commerce offerings. In North America and Europe, that trend may play out through consolidation—fintech firm PayPal was reportedly considering the acquisition of social platform Pinterest, until shareholders pushed back. “We’ve seen superapps particularly in the East, which is incredibly e-commerce-active,” Lütke acknowledged Thursday, in response to an analyst question. “I think we’ll see more of that in the West, too.”
But Lütke doesn’t think the trend is a threat to Shopify. “We set ourselves as a strategy that we want to make it so that entrepreneurs can build businesses and engage in retail behind, ideally, every icon on any ordinary person’s phone screen,” Lütke said. “So we are working with the people who are building the superapps.”
Also of note: Shopify had total net profit of nearly US$1.15 billion for the quarter, thanks in large part to US$1.34 billion in unrealized gains on its equity holdings in other companies. It can thank buy-now, pay-later firm Affirm and Global-E Online, an international selling-tool maker, for much of those gains. The total value of those stakes and other investments—it’s participated in several venture deals in its partner ecosystem this year—rose to almost US$4.45 billion as of the end of September, up from nearly $2.80 billion three months earlier.
