RBC Capital Markets thinks 2Q17 estimates are beatable, but RBC does not like the risk-reward, especially given some more mixed data points this Q. While 3rd party traffic data sources appear bullish and the pace of innovation is high, RBC saw a down-tick in growth from our partner survey and some commentary on churn from the recent Plus price changes. Remain SP on valuation, PT $78.
RBC expects upside to forecast 2Q17E revenues / NG OP / Adj. EPS of $143.5M/ ($7.1M)/ ($0.08) vs consensus of $143.9M/ ($6.8M)/ ($0.07). SHOP’s guidance was for revenues/ NG OP of $142-144M/ ($18M-$20M). RBC views numbers as beatable given seasonality and third party channel checks/datapoints. SHOP beat consensus revenue by 5% in 1Q17 vs. the average 7% of the prior 3 quarters.
RBC emphasizes that the surveyed base remains small relative to Shopify’s overall merchant count. Positives: i) Early days for Amazon integration; ii) Continued share gain and uptake of ancillary services. Negative: i) Downtick in growth expectations from survey partners vs prior periods; ii) The pricing changes at Shopify Plus are causing churn (>10%) amongst surveyed partners’ customer bases; iii) More people are citing Shopify as expensive relative to value than in prior surveys.
RBC researched the exchange platform and find: i) Merchant count is a deceptive number given large number of low value merchants. ii) We also dig into the financials of a (relatively successful) dropshipping Shopify Merchant and derive additional color into potential additional channels, payment economics, cost of Shopify relative to other line items, and next logical areas in merchant solutions that Shopify could address.
Recent initiative updates: i) Oberlo acquisition (a drop-shipping app); ii) Diamond partner at Alibaba's Gateway conference (Alibaba does not yet have a marketplace integration to Shopify); iii) Kit CRM is now free (an effort to drive adoption, in RBC view); iv) Launch of Exchange (which emphasizes the difference in value of long-standing successful merchants vs. new, small merchants) ; v) Shopify Capital scaling rapidly (we see ~ $50M+ direct balance sheet exposure possible); and vi) Ebay channel added.