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Oct 29, 2020

Shopify sees growth ahead but CEO stays skeptical about deals

Shopify blows past third-quarter earnings estimates

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The founder of Shopify Inc. says the company is focused on expanding market share as more companies move their businesses online, but will take a cautious approach to mergers or acquisitions.

“There’s a lot of reductionist thinking, especially about M&A,” Chief Executive Officer Tobi Lutke told analysts Friday during the third quarter conference call. “The opportunity cost of integrating is enormous. We are trying to take a broad picture perspective. This has made us potentially more careful but I also think just more realistic.”

Lutke didn’t rule out strategic deals and said the company is constantly rethinking its strategy, but added: “I’m not a huge fan of M&A for acquiring revenue.”

Shopify held a 5.9 per cent share of U.S. retail e-commerce sales in 2019, putting it ahead of all competitors except Amazon.com Inc., which had a 37 per cent share, according to the company’s quarterly presentation to investors. Ottawa-based Shopify blew past market expectations on Thursday, posting higher-than-expected revenue of US$767 million and an adjusted profit that was more than twice analyst estimates.

The shares were up 0.4 per cent to $1,369.86 as of 11:21 a.m. in Toronto.

“Key from here will be sustainability of demand from newly acquired merchants,” Citigroup analyst Walter Pritchard wrote in a research note. “However, given continuation of strong merchant adds and sustained pace of transactional revenue growth into Q3, we note Street estimates likely have a long way to come up.”

Shopify’s stock has soared as more companies adopt its online selling software and other services. The COVID-19 pandemic accelerated the trend: Gross merchandise volume -- a measure of product sales flowing through the Shopify platform -- was $30.9 billion in the third quarter, an increase of 109 per cent. Its Canadian-listed shares are up about 160 per cent this year.

Shopify opted not to provide fourth quarter or full-year financial guidance. Key risks include “unemployment, fiscal stimulus, and the magnitude and duration of the COVID-19 pandemic, all of which may impact new shop creation on our platform and consumer spending,” the company said.

“Shopify’s e-commerce operating system continues to vacuum up market share among SMBs, capitalizing on strong underlying e-commerce trends and providing many businesses a lifeline during challenging macro conditions,” Colin Sebastian, an analyst with Robert W Baird & Co. Inc., wrote in a note following the earnings.

The company is positioned to beat pre-earnings estimates for the fourth quarter, he said, although “that lack of Q4 guidance may limit near-term upside in shares.”