Shopify – cautious outlook despite strong Q4 2022 results

Shopify, the Canadian e-commerce company, reported excellent results for Q4 2022, with gross merchandise volume up 12% to $61bn, of which a record $34.2bn was processed by Shopify Payments. However, despite the strong performance, investors were unnerved by management’s more pessimistic outlook for growth in 2023.

Revenue was up 26% supported by a 30 basis points increase in take rate to 2.84%, indicating the company’s success in upselling value-added services to its existing customers. While Shopify does not provide a detailed breakdown of its revenues by geography, management noted that 45% of its merchants are based outside North America although these only account for 27% of revenue. 25% of merchants are in EMEA, 15% in Asia Pacific and 5% in Latin America.

Shopify Payments, which is a processing solution provided to Shopify by Stripe, saw volume up 23% and now accounts for 56% of total sales through Shopify merchants, up 5 percentage points on Q4 2021. Shopify Payments is steadily squeezing out 3rd party processors from over $200bn annual payment volume. It’s a very impressive performance.

Shopify’s strong payment performance was attributed to several positive factors, including an expanded penetration for Shop Pay, a one-click checkout, cleverly supplemented with BNPL options powered by Affirm for US merchants. Shop Pay has been a resounding success, accounting for $11bn GMV in Q4 alone. Shopify Payments was also aided by strong growth in Shopify POS which is available in 14 countries. 

Shopify has seen offline volume grow quickly, up 25% in Q4 and up over 40% on a full-year basis. POS merchants tend to be larger merchants that value Shopify’s ability to “control the end-to-end experience on the device from app updates, to permissioning, to point-of-sale onboarding.”

Harry Finkelstein, President of Shopify, is especially pleased with the POS performance and its ability to help Shopify reach larger omni-channel merchants. He said: “Now that [our] point-of-sale can power 1,000 retail stores, our merchants that come first and foremost for point-of-sale and then expand to online store as well.“ For example, Shopify has helped Culture Kings, an Australian streetwear brand, open a flagship store in Las Vegas.

Shopify’s Merchant Solutions business, which includes payments, saw revenue rise 30% year-on-year to $1.3bn. However, gross margins contracted 5 percentage points to 36%. Merchant solutions margin was impacted by higher credit card usage, which increased expenses while merchant prices were fixed.

Management confirmed that it is in discussions with Amazon about offering “Buy with Prime” to Shopify merchants. However, there are clear concerns about disintermediation, and Finkelstein emphasized that it must be done in a way that maintains merchants’ relationships with their end-consumers.

In other product news, Shopify’s Commerce Components, launched in January, offers complex merchants the opportunity to use selected items from the Shopify stack, which they can integrate with their existing systems. Mattel, the toy brand, is the first to take the product. As a sign of how big this move could be, Accenture, Deloitte, EY and KPMG have all signed up as delivery partners to help their clients move to Shopify.

Looking ahead to 2023, Shopify’s management is cautious about the macro-economic environment, guided revenue growth expectations lower and sought to reassure investors that it would not be overinvesting. CFO Jeff Hoffmeister said: “We recognized a challenging macroeconomic backdrop and are focused on carefully balancing our growth investments with strict operational discipline.” 

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