Shopify (NYSE:SHOP) Delivers Strong Q2 Numbers, Gross Margin Improves

E-Commerce software platform Shopify (NYSE:SHOP) beat analysts' expectations in Q2 FY2023, with revenue up 30.8% year on year to $1.69 billion. Shopify made a GAAP loss of $1.31 billion, down from its loss of $1.2 billion in the same quarter last year.

Is now the time to buy Shopify? Find out by accessing our full research report free of charge.

"Our business momentum has led to another quarter of strong financial results. We're not just shipping products faster, but we are also expanding our global merchant base, all while improving our ability to generate greater free cash flow," said Harley Finkelstein, President of Shopify.

Originally created as an internal tool for a snowboarding company, Shopify (NYSE:SHOP) provides a software platform for building and operating e-commerce businesses.

While e-commerce has been around for over two decades and enjoyed meaningful growth, its overall penetration of retail still remains low. Only around $1 in every $5 spent on retail purchases comes from digital orders, leaving over 80% of the retail market still ripe for online disruption. It is these large swathes of the retail where e-commerce has not yet taken hold that drives the demand for various e-commerce software solutions.

Sales Growth

As you can see below, Shopify's revenue growth has been over the last two years, growing from $1.12 billion in Q2 FY2021 to $1.69 billion this quarter.

This was a standout quarter for Shopify with quarterly revenue up 30.8% year on year, above the company's historical trend. On top of that, its revenue increased $186 million quarter on quarter, a strong improvement from the $227 million decrease in Q1 2023. This is a sign of acceleration of growth and very nice to see indeed.

Ahead of the earnings results announcement, the analysts covering the company were expecting sales to grow 15% over the next 12 months.

The pandemic fundamentally changed several consumer habits. There is a founder-led company that is massively benefiting from this shift. The business has grown astonishingly fast, with 40%+ free cash flow margins. Its fundamentals are undoubtedly best-in-class. Still, the total addressable market is so big that the company has room to grow many times in size. You can find it on our platform for free.

Profitability

What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Shopify's gross profit margin, an important metric measuring how much money there's left after paying for servers, licenses, technical support, and other necessary running expenses, was 49.3% in Q2.

That means that for every $1 in revenue the company had $0.49 left to spend on developing new products, sales and marketing, and general administrative overhead. While its gross margin has improved significantly since the previous quarter, Shopify's gross margin is still poor for a SaaS business. It's vital that the company continues to improve this key metric.

Key Takeaways from Shopify's Q2 Results

With a market capitalization of $86.5 billion, a $4.78 billion cash balance, and positive free cash flow over the last 12 months, we're confident that Shopify has the resources needed to pursue a high-growth business strategy.

We enjoyed seeing Shopify materially improve its gross margin this quarter. We were also excited that its revenue growth outperformed Wall Street's expectations, driven by better-than-expected results in GMV, GPV, and subscription and merchant services revenue. Overall, we think this was a strong quarter that should satisfy shareholders. Investors were likely expecting more, however, and the stock is down 1.67% after reporting, trading at $61.36 per share.

Shopify may have had a good quarter, but does that mean you should invest right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.

One way to find opportunities in the market is to watch for generational shifts in the economy. Almost every company is slowly finding itself becoming a technology company and facing cybersecurity risks and as a result, the demand for cloud-native cybersecurity is skyrocketing. This company is leading a massive technological shift in the industry and with revenue growth of 50% year on year and best-in-class SaaS metrics it should definitely be on your radar.

The author has no position in any of the stocks mentioned in this report.