Shopify Earnings Q1 2020: Is Growth Understated?

Shopify (SHOP) has been on a tear. The stock has doubled off its mid-March lows and is now 20% above its pre-crash peak. Due to its considerable small and medium business (SMB) exposure, the company was initially characterized as a net loser in a post-COVID environment, and resulting earnings reductions brought pressure to shares. However, the company has also been delivering on larger merchant wins, and now more than ever, those merchants need to double down on their digital strategies.

Ahead of Shopify’s earnings report, we used our data to verify:

1. Is SMB cautiousness overstated?
2. Will enterprise-level wins offset any weakness in its lower tail?

A Deep Dive Uncovers A Growing Trend

We leveraged our proprietary subdomain traffic data to assess the health of both Shopify’s subscription and merchant solutions trends across client tiers and cohorts. Subdomains represent individual clients with online stores powered by Shopify. As it turns out, both SMB and enterprise clients are experiencing significant traffic acceleration in Q1 2020, and that pace has continued into Q2. Growth in unique visitors has been faster at the higher end of the client spectrum, which sets up a stronger foundation for gross merchandise volume (GMV).

On April 1st, Shopify pulled its 2020 guidance and simultaneously launched an extended 90-day free trial (vs. 15-day trial prior) for standard plan signups, drawing another round estimate cuts from the Street on lower revenue contribution from new merchants, as well as raising general concerns over the health of the pipeline.

But new estimates for Shopify earnings might prove too gloomy. Consensus on Merchant Solutions’ segment revenue for Q1 2020 is currently modeled at ~$260m, or up 44% YoY, and represents a substantial deceleration from the 53% pace in Q4 2019.

All in all, our data show that current expectations might prove to be too cautious, with a stronger run rate in Merchant Solutions. That pace should continue to accelerate into Q2 2020, as a ramp-up in “high-tier” clients more than offsets the revenue contribution headwinds from the 90-day free trial extension at the lower pricing tier.

A Foundation For GMV Acceleration

Looking forward, after a softer H2 2019, Shopify is beginning to deliver larger client acquisitions. Shopify has been identified as a critical vendor for larger specialty retailers to supplement and promote during lockdowns, and its platform will likely prove to be a necessary backbone of an increasingly omnichannel strategy going forward.

Meanwhile, visits to pay.shopify.com, which generates traffic from myshopify domains, as well as express pay referrals from Shopify Plus (Avg. Monthly Recurring Revenue [MRR] ~$6k), have accelerated throughout the quarter and into April from clients with unique brand domains (i.e. allbirds.com).

Additionally, while always choppy, we’ve seen no discernible changes in client retention in recent cohorts, which can be partially explained by higher client quality, but also by higher overall eCom traffic.

Changes in Shopify’s Client Mix

In addition to these insights, we have analyzed Shopify’s client mix and believe the changes we see will have a long-lasting effect on Shopify earnings. You can read our full analysis and conclusion by downloading our full SHOP Q1 2020 report below:

Further Reading: Amazon vs. Shopify: Which Is Better in 2022?

Written By: Jeremy Scott, CFA