How Much Does Shopify Inc (US) (SHOP) Need to Spend to Grow Net Adds? Ross MacMillan Asks Key Questions

Though SHOP delivered a strong 4Q earnings show, RBC Capital's Ross MacMillan still spots downside, even as he boosts his price target on the stock.

Shopify Inc (US) (NYSE:SHOP) may not have swung a cautious analyst to take the bet on the Canadian e-commerce giant, but the company’s fourth quarter earnings beat did elicit some new confidence- even from the sidelines.

Last Thursday, the company swung out a fourth quarter outclass that rode a wave of revenue-meets-profitability, thanks to stellar merchant adds.

RBC Capital analyst Ross MacMillan notes this is a case of “if you build it, they will come,” noting the quarterly picture boils down to, plain and simple, “all about the surprise in net merchant adds.”

Compared to the analyst’s expectations last year for roughly 10% growth, SHOP blew forecasts out of the water with 73% growth in net adds to around 232,000 last year.

Additionally, the analyst cheers that the performance has led “revenue and cost estimates [to] go up.”

“The big question is whether investments are all for future initiatives or whether the size of the merchant base coupled with attrition means this level of spend is necessary to sustain growth,” notes MacMillan.

For the fourth quarter, SHOP posted $222.8 million in revenue along with $0.15 in non-GAAP EPS against the Street’s estimates looking for $209.7 million in revenue and $0.05 in non-GAAP EPS. Monthly recurring revenue (MRR) growth hit 62% for the quarter, with gross merchandise volume (GMV) reaching $9.1 billion, Plus MRR landing at $6.3 million, take rate securing 1.4%, and payment penetration soaring to 39%. These as well as impressive merchant adds (which rocketed 28% year-over-year to 67,000 adds) all stand out as “positive data points” from where MacMillan is standing.

The SHOP team guided first quarter of 2018 revenue to $200 million along with non-GAAP operating income (NGOI) of ($7 million) at the midpoint, compared to the Street’s $197.1 million in revenue and ($3.2 million) in NGOI forecasts. For 2018, SHOP sets expectations for $980 million in revenue and a quarter where the company plans to hit breakeven, against the Street’s estimates of $953.6 million and $24.7 million.

Ultimately, “Mgmt talked to no deterioration in CAC, while LTV is moving up due to share of wallet. The historical cohort data still looks decent (stability of revenue from the cohorts of pre-2015 and 2015) and mgmt. said that merchants that have been on the platform for 12M+ grew GMV ~20%, above the rate of ecommerce. But GMV/ average merchant was +7% in CY17, highlighting the addition of smaller merchants. The key question remains how much the company needs to spend to grow net adds in the face of an ever larger pool of smaller merchants that will have higher churn,” the analyst concludes, enthused by a “decisive beat,” but still finding questions left to be answered.

Pinpointing better multiples, the analyst reiterates a Sector Perform rating on SHOP stock while bumping up the price target from $103 to $120. However, this notably still implies a close to 13% downside from where the shares last closed, painting more caution than enthusiasm in MacMillan’s perspective. (To watch MacMillan’s track record, click here)

TipRanks highlights a Wall Street split between the bulls and the bears when it comes to the Canadian e-commerce platform’s prospects. Based on 13 analysts polled in the last 3 months, 7 rate a Buy on SHOP stock while 6 maintain a Hold. The 12-month average price target stands at $137.25, aligning with where the shares last closed.

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