Chapter 1: What is the main topic discussed in this episode?
Amazon's next target is shipping on Motley Fool Hidden Gems Investing. Welcome to Modern Fool Hidden Gems Investing. As we've said before, new name, same great podcast. I'm Tyler Crowe. I'm your host today. I'm joined by longtime Fool contributors, Lou Whiteman and Matt Frankel.
As I mentioned in the headline, we're going to talk about this new move that Amazon is doing by going into the shipping and logistics business in ways that they've never done before. Also, we're going to answer some listener mailbag questions. But first, we want to start with the topic that we started to the day. It is earnings season, so we want to get into earnings at Shopify.
Shares of Shopify are down about 9% as we are taping this podcast today. It was down as much as 10% both in pre-market and early market trading this morning after the company released first quarter earnings. Of all the three of us here, I am the non-Shopify follower here, so I'm going to lean on you guys. When I first looked at the press release, I would say in a vacuum, the numbers looked fine.
Revenue was up 34% year over year. Gross merchandise volume, which the amount of stuff that was bought on its platform, would pass $100 billion for the first time. Net income, taking out some investment gains and losses that aren't really related to the actual operating business, was $360 million. Though, here's the knock. It did miss expectations for the quarter.
And this is the second quarter in a row that it actually missed Wall Street expectations for operating earnings. So, guys, I want to get your thoughts on this. And was this missing Wall Street earnings for the second time kind of adding to AI jitters? Was it maybe just Wall Street's expectations being a little too high? When you saw these results, how did you see them? Matt, let's start with you.
Well... Like pretty much any other stock in earnings season, it's all about expectations. Shopify grew revenue by 34% in the first quarter, but they're guiding for full-year revenue growth in the high 20s range. If you have 34% in the first quarter, high 20s the rest of the year, the law of averages tells you you're going to have a slowdown as you head into the rest of the year.
I'm not as worried about the net income number and the net income miss. I don't think that's what's driving the stock here. If a company's growing sales at 34% year-over-year and is profitable, then that's great in and of itself. Shopify is in a very investment-heavy phase right now. As you mentioned, it's trying to keep up with AI headwinds and things like that.
That can make bottom-line income lumpy.
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Chapter 2: What were the key highlights of Shopify's latest earnings report?
But we really need to show the revenue growth to justify the spending. It needs to keep revenue growth at an elevated enough level. It doesn't sound like they gave an optimistic enough outlook to satisfy investors with the stock trading at 65X forward earnings, more than 12X sales. Whatever metric you want to use, it's an expensive stock.
And that's the thing. It's funny because we're all guilty of it. We all like scoreboards, right? So we look at what the stock is doing and say, bad quarter, bad company, good quarter, good company. And sometimes, usually, it's not that simple. Tyler, yeah, it looked good in a vacuum. It looked good in a dustbin. It looked good in a Swiffer. It looked good. This was a good quarter.
But everything is relative. Valuation is returning to earth, but arguably not yet on earth. And when you trade at a premium, you... are expected to deliver a premium return. Shopify's guidance doesn't clear the bar for me. Apparently, it doesn't clear the bar for the market either. And I think that's basically, you know, not company bad, company good. I think that's the conclusion.
I'd note here, too, is like, oh, if you look at five years, Shopify is basically flat. They're like up, I think, 1%. Now, they've been up 80% and cut in half during that period. So this is a company that tends to swing violently around different moods. I own the stock. To me, it's a definition of a hold. If it comes down, it may begin to look interesting to add to it.
But we also have the weaker consumer still looming as a question mark. I think this is just focus on the long term and not get too caught up on 20% versus 30% in any one quarter.
Matt, I want to dig a little bit more into what you were mentioning about this being an investment-heavy phase for the company. This is something that I found a little peculiar. As I was looking through the press release, I was looking at the financial statements. This is where something feels different for me, and I'm trying to figure it out.
It has lots of cash, and it also holds a lot of equity in long-term investments in other companies relative to the total balance sheet of its size. I would expect a high amount of investments in other companies. If it was an insurance company or something like that, going out and making investments
investing in the float but this is an e-commerce software and platform company that's looking to invest in its platform looking to you know build out better multi-channel solutions for its clients as well as you know fending off this world of ai like how does shopify fit in this world of ai and yes the company throws off a lot of free cash flow and it has more than its needs and so
holding onto equity is not a big deal, but three quarters of its balance sheet is either cash equivalents like treasuries or investments in other companies.
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Chapter 3: Why did Shopify's stock drop despite strong revenue growth?
I wouldn't sell these investments just because, unless you need to, and it doesn't look like they need to. Matt can get into it. I don't think that this is really a distraction on management's time. I don't think they're out doing the Warren Buffett thing, reading through 10-Ks, trying to find companies to invest in, things like this. This is trying to capture upside of partnerships.
I think, Matt, I mean, you can get into that, but this to me, I don't have a problem with.
You correctly pointed out that three-fourths of the balance sheet is investments and cash and equivalents, which I'm a big fan of having a lot of cash and equivalents on the balance sheet, first of all. So that's a big positive for Shopify. But for the most part, and Lou kind of mentioned this, the outside investments were the results of partnerships. So for example,
The largest investment Shopify has in a publicly traded company that's not Shopify is Affirm. They own a roughly $1.5 billion stake. It started when Affirm became the exclusive provider of ShopPay installments even before they went public. They granted Shopify warrants as part of the deal at a $0.01 exercise price.
It was really a deal sweetener to be, we want exclusivity on your new product and we'll give you some equity in our company. A similar situation occurred when Global Eve formed a cross-border logistics partnership with Shopify in 2021. They got equity as part of the deal.
Shopify's management has specifically said several times that these investments aren't relative to the fundamentals of its business. They're not what management's focused on. They're smartly negotiated perks in exchange for partnerships, not a core part of their strategy. After all, like I said, a firm literally costs next to nothing. I don't dislike this part of the strategy.
I don't think it's a distraction from management.
That's fair. Again, in the vacuum, less familiar, you see all these equity investments. You're like, that doesn't make a lot of sense. The one thing I would point out, though, is that this is a company that does use a lot of stock-based compensation.
Throwing off a lot of cash while throwing off a lot of stock-based comp, maybe start using some of that cash to pay some investors, or pay your employees and let the investors not get diluted as much. I wouldn't argue against that at all, Tyler. Coming up after the break, Amazon's daring move into supply and logistics.
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