Partnerships With FC Barcelona And Reebok Will Boost Future Market Position

Key Takeaways

• Investments in AI and expanding product offerings aim to enhance merchant efficiency, boosting earnings and operational margins.
  
• Focus on international expansion and strategic B2B investments targets higher revenue growth and market share gains.
  
• Rapid expansion and competition may strain Shopify's resources, impacting growth, profitability, and revenue due to various internal and external pressures.

Catalysts

A commerce technology company, provides tools to start, scale, market, and run a business of various sizes in Canada, the United States, Europe, the Middle East, Africa, the Asia Pacific, and Latin America.

• Shopify’s focus on expanding global reach and scale is expected to drive significant future revenue growth, with international regions already outperforming North America. (Revenue)
  
• The continued investment in AI capabilities, such as Sidekick and enhanced product offerings, plans to boost merchant efficiency and productivity, potentially leading to increased earnings and operational margins. (Earnings, Net Margins)
  
• Shopify’s substantial increase in larger, high-volume brands joining the platform, such as FC Barcelona and Reebok, points towards a higher average merchant size and improved merchant solutions take rate, which could expand revenue and merchant solutions margins. (Revenue, Net Margins)
  
• Ongoing development in Shop Pay and Shop App features are poised to enhance GMV conversion rates and drive greater payment revenue, particularly from enterprise-level brands. (Revenue)
  
• Strategic investments in B2B commerce and offline solutions, including point-of-sale enhancements, are designed to capture larger market segments, supporting long-term growth in both top-line revenue and market share. (Revenue, Market Share)

Shopify Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Shopify's revenue will grow by 21.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 22.7% today to 16.7% in 3 years time.
• Analysts expect earnings to reach $2.7 billion (and earnings per share of $2.13) by about March 2028, up from $2.0 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $3.4 billion in earnings, and the most bearish expecting $2.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 82.1x on those 2028 earnings, up from 60.3x today. This future PE is greater than the current PE for the US IT industry at 43.2x.
• Analysts expect the number of shares outstanding to grow by 0.48% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.71%, as per the Simply Wall St company report.

Shopify Future Earnings Per Share Growth

Risks

• The increasing competition and rapid expansion of Shopify into various international markets might strain resources and lead to execution challenges, potentially impacting growth and profitability. This could affect revenue if expansion is not managed well.
  
• The reliance on high growth in Merchant Solutions and the potential normalization of Subscription Solutions' growth might diminish profitability if expected growth metrics are not sustained, which could impact net margins.
  
• Issues related to increased cloud and infrastructure costs impacting Subscription Solutions' gross margin might persist, thus affecting overall profitability and earnings.
  
• Changes in trial periods to three months could delay revenue recognition, impacting short-term subscription revenue growth figures.
  
• Continued investments in AI and other initiatives without a guaranteed return may strain financial resources, potentially affecting free cash flow margins if these investments do not lead to proportionate revenue increases.

Valuation

• The analysts have a consensus price target of $134.541 for Shopify based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $175.0, and the most bearish reporting a price target of just $100.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $16.1 billion, earnings will come to $2.7 billion, and it would be trading on a PE ratio of 82.1x, assuming you use a discount rate of 7.7%.
• Given the current share price of $94.01, the analyst price target of $134.54 is 30.1% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.