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Bagnall: Shopify's spectacular Q3, and a warning

When a company tops consensus revenues by an astounding US$115 million, as Shopify did in its third quarter, you would normally expect its shares to benefit. Instead, Shopify shares tumbled five per cent Thursday.

The problem? A caveat embedded in Shopify’s Thursday morning announcement. Near-term demand for the company’s products, the company noted, “depends on several external factors that are particularly fluid at present.” Among the variables: the jobless rate, the extent of government stimulus and the rate at which COVID-19 infections finally decline.

If the trend lines go the wrong way, these could hurt Shopify’s ability to entice newcomers to set up online stores. The monthly subscriptions that result make up 30 per cent of the firm’s revenues. More important, an economic downturn would crimp consumer spending on merchandise, online or not. Shopify depends on fees from its one million merchants that vary according to the level of online spending. These comprise 70 per cent of the company’s revenues.

Another imponderable, not mentioned Thursday by the company, has been the gradual retreat of e-commerce sales generally since the pandemic peak in May, when Canadian retailers sold nearly C$4 billion worth of merchandise online. This was double the sales volume of the pre-Christmas period last year. As retailers have re-opened offline, e-commerce sales retreated to C$2.8 billion in August, suggesting that consumers still prefer to do much of their shopping in person when given a choice.

Even so, the longer-term shift to online commerce appears firmly entrenched, even if it doesn’t occur at the frenetic pace seen during the first seven months of the pandemic.

Indeed, Shopify’s third-quarter financial snapshot suggests the Ottawa-based firm is picking up more than its fair share of the online revenues generated by this transition.

The company reported a near doubling of sales year-over-year to US$767.4 million — substantially ahead of the consensus estimate of US$652 million, according to Thomson Reuters. The surge was driven mainly by the 132 per cent jump in fees paid by Shopify merchants for software apps ranging from payment processing to inventory management and shipping. Subscription revenue was up a comparatively modest 48 per cent year over year.

Thanks to the huge pickup in revenues, Shopify recorded a third-quarter operating profit of US$51 million, compared to a loss of US$36 million in the same period a year earlier. It’s the company’s second consecutive operating profit, a distinctively COVID-19 development. Shopify has traditionally lost money, reflecting its enormous investments in new products, technology and hiring. The company employs 5,000 — including about 1,000 in Ottawa — scattered mainly in home offices in Toronto, Vancouver, Montreal and Waterloo.

Shopify has plenty of money on hand to withstand any potential storm. The company on Thursday reported cash reserves of US$6 billion plus at the end of September — thanks largely to its history of selling treasury shares to take advantage of its typically robust share price.

For company founder and CEO Tobi Lütke, who tends to look years ahead, it’s all just a means to an end. “The goal for us is to make things as simple as possible (for retail entrepreneurs),” he said Thursday. “We’re chipping away one step at a time,” he added in reference to Shopify’s investments in solving the complicated logistics of getting merchants’ sales into customers’ hands as neatly and quickly as possible.

Lütke and his team have spent 14 years developing and tweaking an online technology platform for retailers. More recently, Lütke has talked about creating a “100-year company.” He is not building a firm that relies on quarterly feedback from investors. It’s why Shopify was ready for the unexpected surge in business inspired by COVID-19. It’s also why short-term gyrations in revenues or share value, if they come in the next few quarters, don’t concern him.

For momentum investors, it may be an entirely different calculation.

Copyright Postmedia Network Inc., 2020

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