Shopify reported Q3 results that came in slightly below expectations as consumers reverted to offline shopping during the quarter. However, growth remained robust as sales grew over 40% and YTD GMV increased to over $120 billion. Shopify also announced it is increasingly expanding into social commerce, which I discuss in greater detail below. We are bullish on Shopify and the company will remain a LTBH position into 2022.
Note: Beth Kindig contributed to this analysis
Shopify’s Q3 results
Total Q3 sales increased 46% YoY to $1.12 billion, which missed the Street’s estimate by $22 million (2%). Sales were driven by a 51% YoY increase in Merchant sales, which rose to $788 million. Merchant sales were supported by growth in GMV, which increased 35% YoY to $41.8 billion, after increasing 109% in the prior year quarter. Specifically, GMV penetration in Shopify Payments increased from 45% to 49% including from point-of-sale hardware for offline sales. Shopify’s goal with Merchant Sales was to support both online and offline with the economy reopening. The partnerships with Affirm and Global-E also contributed to this growth.
Here's an excerpt discussing this:
“Just to sort of give a little more color on point of sale because I do think Q3 was our best quarter for the retail business. Retail GMV hit an all-time high. But we are bringing Shopify as a very efficient go-to-market model to the POS industry. We're not leaning on established networks of partners, but rather we're doing this in a really efficient way. … Again, retail GMV is the second largest contributor to overall GMV behind the online store. We also saw point-of-sale with Shopify Payments continue to expand globally… Point of Sale Pro is available now across more devices like Android devices.”
Following the growth in merchant sales, subscription sales increased 37% YoY to $336 million, which slightly outpaced the 33% YoY increase in monthly recurring revenue. According to management, this is being driven by merchants globally adopting the Shopify platform. International is an area where Shopify is investing with currently 28% of purchases coming from international buyers.
While GMV growth has been strong, GMV moderately declined QoQ from Q2, as consumers shopped more offline as restrictions from Covid-19 have been eased and stimulus has dissipated. Through the first nine months of the year, GMV increased to a record $121 billion. In fact, the company pointed out that GMV has doubled over the past 16 months from $200 billion in June of 2020 to $400 billion at the beginning of October. GMV, or Gross Merchandise Volume, represents the total dollar value of orders facilitated on the Shopify platform including revenue-sharing arrangements. It helps to demonstrate the growth of Shopify’s platform and its reach. As of now, Shopify owns 8.6% of the market measured in GMV and is in second place behind Amazon, with a wide lead at 39%. Shopify’s second-place ranking excludes merchant point-of-sale which was a big driver for Shopify this year, so it’s percentage could be higher.
Looking forward, subscription sales will likely continue to be strong given the company’s high levels of deferred revenue. Deferred revenue surged 216% YoY to $378 million, or 113% of three-month subscription sales. However, deferred revenue was skewed by large amounts of non-cash considerations from new partnerships that Shopify has signed. I discuss these partnerships in greater detail below. Nevertheless, after adjusting for non-cash consideration, deferred revenue still increased 42% YoY to $137 million, which represented 41% of quarterly subscription sales, up 100 bps YoY from 40% in Q3 2020. The relatively higher level of deferred revenue positions Shopify for continued growth since it provides balance sheet support for future sales.
Continuing down the income statement, gross profit margin increased 100 bps YoY to 54%, while adjusted operating margin declined 500 bps YoY to 12% as the company ramped investments in sales and marketing expenditures. GAAP EPS surged YoY from $1.59 in Q3 2020 to $9.18 in Q3 2021 while adjusted EPS declined YoY from $1.13 to $0.81, which missed estimates by $0.41. The large disparity between GAAP and non-GAAP was driven by $1.3 billion in unrealized gains from its investments in Affirm and Global-E, which were excluded from earnings. These large gains are a direct result of Shopify’s partnership agreements, which I also discuss in greater detail next.
Shopify expands partnerships into social commerce
Shopify has expanded its reach beyond traditional e-commerce by partnering with and incubating new companies. As mentioned above, Shopify received shares in Affirm and Globe-E last year in return for cash considerations while working as a partnership, which has resulted in over $3 billion in gains in less than a year (note that not all partnerships result in equity awards).
The company has continued this trend and has announced a series of new partnerships that help expand its role into social commerce. For instance, Shopify recently announced partnerships with TikTok, Spotify and Roku ahead of the holiday shopping season. In August, Shopify announced a partnership with TikTok and introduced TikTok Shopping. Business owners will now be able to sync their product catalogues to their TikTok profiles that creates “a mini-storefront that links directly to their online store for checkout … The TikTok community can choose to shop directly from the merchant’s storefront or click a tagged product in a merchant’s TikTok video, which will take them to the merchant's online store for checkout”.
The TikTok partnership could be significant in the future as the platform is one of the fastest growing social media sites with hundreds of millions of users. This partnership should drive demand for Shopify’s merchant solutions, as well.
Shopify also announced a partnership with Spotify in October, expanding further into social commerce. Fans can now purchase merchandise, tickets and even tip artists through a Shopify integration directly on Spotify. Spotify is the largest artist platform with over 365 million global listeners, and this partnership has the potential to grow significantly as fans are increasingly spending more on their favorite artists. For example, the global average music fan increased their spending by 17% from $5.54 in 2019 to $6.49 in 2021. According to Spotify, there are over 8 million artists on the platform, which could be a significant tailwind to Shopify if they begin to set up their own Shopify integrations selling their own merchandise and tickets.
Lastly, Shopify also announced a partnership with Roku in September. Roku is launching an app that allows Shopify merchants to “easily build, buy, and measure TV streaming advertising campaigns. Roku’s addition to Shopify’s marketing solutions will become the first-ever TV streaming app available in the Shopify App Store, opening the door to small and medium-sized businesses to build stronger brands and increase revenue through TV advertising”. This unique partnership allows Shopify merchants with relatively small ad budgets to advertise on television, a medium that has typically been reserved for large companies. Given Roku’s rich user data, they will be able to help Shopify merchants better target their audience. Roku added that a recent poll showed that nearly half of “polled consumers said they have seen an ad on their TV streaming device that caused them to pause their TV and shop for the product online”. Roku’s streaming platform is quickly turning into a shopping platform, and the partnership with Shopify should benefit both companies going forward.
On top of the partnerships, Shopify also makes investments in merchants on its platform. Shopify made $394 million in cash advances and loans to merchants in Q3, up 56% YoY. Shopify Capital has grown to approximately $2.7 billion in cumulative capital funded since its launch in April 2016. These investments help merchants grow, which in turn increases GMV and revenues on the Shopify platform.
Moreover, Shopify adequately provisions for potentials losses with these loans. As shown below, Shopify’s provision for loan losses (which protect against collection risk) have vastly outpaced charge offs in 2021. This signals that Shopify is being conservative and is not using Shopify capital to juice earnings but is instead using the program to foster organic growth at the company.
Outlook
Heading into Q4, Shopify did not directly quantify its guide, which isn’t unusual for the firm as Shopify did not provide a Q4 guide last year. Rather, Shopify stated that it expects to grow revenue rapidly in 2021, but at a lower rate than in 2020 (which was a record year). Furthermore, Q4 is expected to continue to be the largest quarter in terms of revenue generation for the year but due to stimulus in Q1 and Q2, the revenue spread will be more evenly distributed across the four quarters than it has been historically.
Shopify also expects that its GMV will grow “substantially faster than the commerce market”. On the call, CFO Amy Shapero said that she expects Shopify to continue to take share of the retail market. Management also guided that it expects costs to slightly accelerate in Q4 as it reinvests back into its business by hiring more engineers to support growth. Despite the acceleration in hiring, the company expects 2021 adjusted operating income to be above the level in 2020.
Following the above description, the Street slightly lowered their Q4 topline estimates by 2% to $1.3 billion, representing a 38% YoY growth rate. However, analyst raised their Q4 estimate for non-GAAP EPS by 8% to $1.32/share. For the year, 2021 sales are expected to increase 56% YoY to $4.5 billion and non-GAAP EPS is expected to grow by 59% YoY and reach $6.34/share. While Shopify hasn’t provided guidance for 2022 yet, the Street expects sales to rise 34% next year and earnings to increase 7%. It is noteworthy that Shopify’s recent expansions into social commerce may not be fully reflected in forward estimates, which provides a potential catalyst for an upward revision in 2022 estimates going forward.
Conclusion
Looking forward, Shopify is expanding its role into social commerce and has partnered with marquee companies such as Roku, Spotify and TikTok. The company’s partnerships have resulted in large gains in the past (ie Affirm and Global-E) and should support growth of Spotify’s merchant platform in the future. The company’s financials have also been strong and Shopify appears to be positioned well to continue to report strong growth going forward.
We did not touch on the Fulfillment Center, yet this is one of the more exciting prospects for Shopify in the future, as is Shop App and more enterprise-level commerce opportunities. For instance, the company’s Shopify App store is now integrated with ERP systems from Microsoft and Oracle for major, large retailers. This is used for companies like General Mills to launch with Shopify Plus for products like Larabar, and also helps prove the sophistication of Shopify as the company seeks to take more TAM from Amazon and other competitors. We will touch on these developments in the future as more information is disclosed.
Recommended Reading:
We previously discussed social commerce and omnichannel in our Q2 analysis here in August, Shopify Premium Analysis for 2021: Deep Dive, Shopify 2019 Analysis where we discussed why Shopify had a unique value proposition