Shopify stock soars 25% as Q3 earnings double

Key points

• Shopify stock soared 25% higher on Tuesday, making it one of the biggest movers.

• The jump was fueled by robust Q3 earnings, which saw adjusted earnings double.

• Is Shopify stock a buy?

The e-commerce platform has had six straight quarters of 25% year-over-year revenue growth.

Shopify (NYSE: SHOP) stock was the biggest movers on Tuesday, skyrocketing more than 25% on the day to about $113 per share.

The e-commerce platform generated $2.16 billion in revenue in the quarter, up 26% year-over-year and ahead of analysts’ estimates of $2.11 billion. It was the sixth straight quarter with greater than 25% revenue growth.

Net income rose 15% to $828 million, but the preferred non-GAAP adjusted earnings spiked 99% to $344 million, or 64 cents per share. That crushed estimates of 27 cents per share. The adjusted earnings exclude the impact of equity investments in third parties, which are not relevant to the fundamentals of the business or indicative of operating earnings.

With today’s meteoric rise, Shopify stock is up about 53% year-to-date to around $113 per share.

GMV jumps 24%

The strong Q3 earnings were driven by robust activity on its shopping platform, combined with sound expense management.

Specifically, Shopify saw a 24% rise in gross merchandise volume, or GMV, to $69.7 billion, which beat estimates of $67.5 billion. The GMV represents the dollar value of orders facilitated through the Shopify platform. Further, its monthly recurring revenue (MRR), which is the number of merchants multiplied by the average monthly subscription plan fee, jumped 28% year-over-year to $175 million.

Overall, Shopify’s subscription solutions revenue climbed 25% to $610 million in the quarter while its merchant solutions arm saw revenue increase 26% to $1.55 billion, which beat estimates of $1.52 billion.

In addition, Shopify was able to keep expenses in check, as they rose just 7% compared to the third quarter of 2023, with general and administrative expenses actually falling 17% to $114 million.

This enabled Shopify to boost its free cash flow by 52% to $421 million, as it gained in each of the first three quarters this year. The free cash flow margin rose to 19%, from 16% in the same quarter a year ago. This is an important measure as it allows to invest in both operations and future growth.

“Q3 was outstanding, further establishing Shopify as a leader in powering commerce anywhere, anytime. Our unified commerce platform is becoming the go-to choice for merchants of all sizes,” Harley Finkelstein, president of Shopify, said. “As the busiest shopping season of the year for our merchants’ approaches, they trust Shopify to provide the tools, unmatched speed, and reliability to maximize their success.”

Is Shopify stock a good buy?

Investors were not only impressed by the strong growth; they were also heartened by Shopify’s Q4 outlook.

The firm anticipates another quarter of robust revenue growth, targeting a mid-to-high-twenties percentage rate spike in revenue in Q4.

Gross profit, which climbed 24% to $1.12 billion last quarter, is expected to see a similar growth rate in Q4 while operating expenses, as a percentage of revenue, are targeted at 32% to 33%. This would be lower than the approximately 38% rate last quarter.

Shopify earned some price target upgrades after Q3 results, including Evercore, which boosted it by $45 to $125 per share. In addition, Roth MKM boosted the target to $135 per share. That would represent a 13% to 22% increase in the share price.

But prior to the Q3 earnings release, Shopify had a median target of $80 per share, which would suggest a 29% drop.

The concern is the P/E ratio, which shot up to 98, with a forward P/E of 68. While it has enjoyed robust and sustained growth, that seems a bit too high and should be monitored.