Key Morningstar Metrics for Shopify SHOP

• Morningstar Rating: 3 stars
• Fair Value Estimate: C$141
• Morningstar Uncertainty Rating: Very High
• Economic Moat: Wide

What We Thought of Shopify’s Earnings

We are raising our fair value estimate to USD $105 per share, from USD $80 previously, for wide-moat Shopify after the firm reported strong results and provided fourth-quarter guidance that was meaningfully better than our expectations. Our fair value estimate for Canadian shares rises to C$141 from C$110. Performance for both revenue and profitability were strong for the second consecutive quarter, with guidance once again being appreciably better than the Street, including ourselves, were expecting. We raised our estimates throughout our forecast, including by more than 100 basis points in annual growth and approximately 50 basis points of margin expansion. Shares are jumping intraday based on strong results, and after a remarkable run since early August the stock has doubled, which we think leaves it fairly valued. 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 maintain durable growth.

Third-quarter revenue strength was impressive, in our view, as Shopify continues to gather more merchants, expand internationally, succeed in offline sales, and drive overall gross merchandise volume, or GMV, expansion. We think this reflects the success of dynamic marketing investments and the company’s growing leadership position. Third-quarter revenue accelerated to 26% year-over-year growth as reported to USD $2.162 billion, ahead of our above-consensus expectations. Relative to the prior-year period, subscription revenue grew 26% year over year, while merchant solutions increased 26%, and both lines were better than we anticipated.

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. GMV accelerated to 24% year-over-year growth to USD$69.7 billion, while gross payment volume processed through Shopify Payments was USD $42.9 billion, or 62% of GMV.

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