Why positive merchant growth could lift Shopify’s share price

Shopify’s [SHOP] share price has been bought up so far this year. Although the stock took a tumble in March as markets reacted to COVID-19, Shopify’s share price reached a 52-week high off the back of its second-quarter earnings. Will the e-commerce giant’s third-quarter earnings report, due on 29 October, have a similar effect on the stock?

Despite starting the year at $403.99, Shopify’s share price fell 18.9% to $322.29 on 16 March. However, within a month the stock had recovered most of its lost value and continued to follow an upward trajectory throughout the summer.

Shopify’s share price hit an all-time high of $1,146.91 before closing $1,134.32 on 1 September, marking a year-to-date rise of 185.3%. The stock has since fallen again, though, declining to an intraday low of $839.40 on 17 September before closing at $870.76.

As of 27 October’s close, Shopify’s share price was up 165.84% year to date at $1082.89.

Sales efficiencies

When Shopify released its second-quarter 2020 results on 29 July, it reported that revenues had grown by 97% from $361.98m in 2019’s second quarter to $714.3m. This beat analysts’ expectations by 40.7%. The remarkable beat pushed Shopify’s share price to a high of $1,107.92 on 29 July, before it closed up 6.9% at $1,053.59.

It was a similar story for earnings. Shopify reported adjusted earnings of $1.05 per share compared to the previous year’s earnings of $0.10 per share. This significant uptick beat the Zacks Equity Research consensus estimate of $0.01 and marked the fourth consecutive earnings beat for the company.

During the earnings call Amy Shapero, Shopify’s CFO, said that the company’s focus would remain on developing its services for merchants not only to “sell more” but to “sell more efficiently”.

Looking ahead, Zacks is projecting Shopify to deliver earnings of $0.44 per share, an increase of 238.4% year-on-year. Meanwhile, analysts are also calling for quarterly revenues of $632.64m, which would mark an increase of 61.9% from last year.

For the full year, consensus estimates project earnings of $2.33 per share and revenue of $2.54bn, which would mark respective growths of 676.67% and 60.85% from last year.

Growth in merchants set to lift earnings

Shopify’s approach to building an e-commerce marketplace could be considered more lucrative than some of its competitors, even the likes of Amazon [AMZN]. Shopify has continued to monetise its merchant solutions segment by taking a small cut of each sale and selling optional services like payments and shipping.

“By focusing on innovations to make its merchant clientele more successful, it has grown its monthly recurring revenues at a 46% compound annual rate over the last five years,” Brian Withers wrote in The Motley Fool.

The software company’s focus on merchants has analysts bullish about its upcoming earnings results. Citi analysts believe it is highly likely that the second quarter’s robust 119% year-over-year boost in gross merchant volume could be seen again in Shopify’s third quarter.

“We note that this analysis does not include the Plus customers that were on free trials and contributed minimally to Q2 revenue. We expect some degree of 'catch-up' here on the subscription side in Q3,” the analysts wrote in a note, according to Seeking Alpha.

“We note that this analysis does not include the Plus customers that were on free trials and contributed minimally to Q2 revenue. We expect some degree of 'catch-up' here on the subscription side in Q3” - Citi analysts

Meanwhile, the consensus among 34 analysts polled by CNN Money is to Hold the stock. This was a rating given by 17 analysts, with 12 suggesting to Buy the stock and two rating it Outperform. There are also two bearish analysts suggesting to Sell and one rating it Underperform.

Among the 27 analysts offering 12-month forecasts for Shopify’s share price on CNN Money, the median target was $1,150, with a high estimate given of $1,400 and a low of $900. The median estimate would represent a 6.2% increase on Shopify’s share price at close on 27 October.