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We have to give management credit. 

Shopify (SHOP) delivered some pretty bad quarterly results last month. CFO Amy Shapero didn’t mince words when she said things weren’t getting better…

We expect to generate an adjusted operating loss for the second half of 2022 with Q3 adjusted operating loss, excluding severance costs expected to materially increase over Q2.

Shopify bet big on the ecommerce boom it saw during the pandemic and got burned.

Now, like many other growth companies, they’re shedding 10% of their workforce and trying to streamline operations, focusing on turning a profit rather than double digit growth.

Interest in the company had waned until earnings, with the stock landing at the bottom rather than the top of software stock searches by financial pros.

But the conference call and outlook generated so much interest and buzz, we felt it was worth a deeper dive into the Canadian conglomerate.

With shares down more than 75%, is there some bit of value to be had?

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Shopify’s Business

Based out of Ottawa Canada, Shopify’s software provides a platform for merchants to quickly set up an online store that can manage all aspects of the sales process.

That includes everything form handling payments and order processing to unique insights curated from Shopify’s massive database of merchant and customer interactions.

Revenues are categorized by subscription solutions (28.4% of revenues) and merchant solutions (71.6% of revenues).

Subscription solutions are the price customers pay to use Shopify’s platform. Merchant solutions refers to the cut of each transaction that Shopify gets.

Financials

Investors flocked to Shopify not because they turned a profit, but because of incredible growth.

In Q1 of 2021, revenues more than doubled form the prior year.

In fact, the company managed to turn a profit and generate free cash flow at the same time.

Now, things have changed.

Revenue growth has slowed, though is still robust.

Gross margins stayed relatively constant. However, operating margins took a major hit in recent quarters.

The biggest challenge the company faced was an increase in both SG&A and R&D expense as a percentage of total revenues.

That’s not surprising given the investments made to expand the business during Covid.

Now, the company has been forced to realign its priorities and focus on driving profitability and cash flow, especially since the cash from operations went negative in the last two quarters.

Given the statements from the earnings call, this isn’t likely to change for the remainder of the year.

The good news is that the company carries relatively low debt with long-term debt at $912 million and capital leases at $254.4 million while holding almost $7 billion in cash.

That’s reflected in the 12x current ratio, indicating more than enough cash to handle multiple quarters of negative cash.

Valuation

Since the company went from positive to negative cash flow, valuation measures aren’t really useful.

The only one with noting is the price-to-sales ratio of 9.49x which is 3x the sector median, and indicative of a growth stock.

Growth

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Speaking of growth, it’s worth noting that forward guidance still suggests the company manages to land revenue growth of 33.72%, which isn’t too shabby.

Our Opinion – 8/10

Yes, the company’s prospects don’t look great here.

However, they have turned a profit and positive cash flow up until recently.

Plus, management recognizes the need to trim headcount and focus on profitability.

Shopify isn’t a company plagued by inflationary pressures. However, they are at the whim of broader economic conditions.

Given the risk/reward, Shopify is a decent play here.

That said, be prepared for high volatility. This should be treated as a speculative play with enough cash to add to a position should it break down further from here.