We are raising our fair value estimate for Shopify (SHOP) to USD 80 per share, from USD 72 previously, for wide-moat Shopify after the firm reported strong results and provided third-quarter guidance that was meaningfully better than our expectations. Our fair value estimate for Canadian shares rises to C$110 from C$99.
Key Morningstar Metrics for Shopify
• Morningstar Rating: 3 stars
• Fair Value Estimate: C$110
• Economic Moat: Wide
• Morningstar Uncertainty Rating: Very High
What We Thought of Shopify's Earnings
Shares jumped based on these positive results, but we still see upside based mainly on higher near-term growth contained in our new fair value estimate. Unlike the last couple of quarters, management delivered on cost containment and strong margins. We continue to believe that Shopify is well positioned as a leader in e-commerce and has a variety of irons in the fire to sustain durable growth.
We are impressed by revenue strength in the quarter and have moved our estimates higher over the next several years. We think this reflects the success of dynamic marketing investments and the company's growing leadership position. Second-quarter revenue grew 21% year over year as reported to $2.045 billion, ahead of our expectations. Normalizing for the sale of the logistics business, revenue expanded 25% year over year. Relative to the prior-year period, subscription revenue grew 27% year over year, while merchant solutions increased 19%. Subscriptions were considerably stronger than we anticipated, while merchant solutions were in line. Overall revenue strength was driven by a combination of continued merchant growth and performance; the impact from price increases; adoption of merchant solutions products like payments; strength in Europe; and offline performance.
In our view, Shopify should build on success in attracting larger brands to the platform, especially given the rash of recently launched features and products, including Markets Pro, Shopify Magic, and Commerce Components Gross merchandise volume, or GMV, grew 22% year over year to $67.2 billion, while gross payment volume processed through Shopify Payments was $41.1 billion, or 61% of GMV.
Shopify's Quarterly Performance is Impressive
Enterprise customers are increasingly adopting Shopify Payments, which is not something we would have expected several years ago. We calculate an attach rate of 3.04%, compared with 3.08% a year ago. Despite the slight decline, we think this should continue to trend up over time as more merchant solutions are adopted. Monthly recurring revenue was $169 million, up 25% year over year.
Despite our expectation for expanding margins, Shopify's performance this quarter is impressive. After continuing to expand marketing expenses during the last couple quarters, management delivered more balance between growth and margins. Still, marketing efforts seem to be paying early dividends even as the bulk of recent spending is likely to show up in 2025 revenues. In the second quarter, non-GAAP operating margin was 14.6%, compared with negative 8.6% a year ago. We see margin strength in the quarter as a result of better revenue, more measured investments, the impact of price increases, and the disposition of the logistics business. Free cash flow was similarly impressive again.
Third-quarter guidance was meaningfully better for both growth and profitability than we were expecting. Not only does strong performance this quarter and good guidance drive our estimates higher, but they also provide direct evidence that recent marketing efforts have provided at least a modest boost to demand earlier than anticipated. We also see the company's robust platform as attracting new merchants.
Third-quarter guidance included year-over-year revenue growth in the low- to mid-20% range and operating expenses between 41%-42% of revenue, both of which were several hundred basis points better than we expected. Management also believes macro conditions remain unchanged. On this last point, management noted it sees the same headlines investors do but believe firm's large and diversified merchant base (in terms of size, industry, and geography) has helped drive strong growth.
