Shopify’s (NYSE: SHOP) stock price action soared following the Q3 release because the results were good, more than good, showing the company's building momentum as it established itself as the go-to source for B2B eCommerce needs. Its unified, AI-enabled platform is gaining traction with businesses of all sizes, leading to four things investors like to hear: outperformance, accelerated performance, widening margins, and gained market share. Today's takeaway is that the 25% post-release increase in share prices is just the beginning of the gains this market will see. A complete market reversal is in play and will likely drive this stock to new all-time highs by early 2025.
Shopify Accelerates Growth in Q3
Shopify had a solid quarter in Q3, with revenue growth accelerating to 26.3% compared to last year’s slightly slower advance. The $2.16 billion in revenue outpaced the consensus by 235 basis points on strength in subscriptions and merchant services. Subscription revenue grew by 25.5% and was led by a 26.4% increase in merchant services. Monthly recurring revenue grew by 27.7%, and gross merchandise volume of $69.72 billion was up 24%.
As impressive as the revenue growth is, the margin news is better. The company widened its operating income and FCF margin due to increasing revenue leverage and improving operational quality, which is expected to continue in the coming quarters. Operating income more than doubled, and FCF grew by 52.5% to $421 million.
Free cash flow is an important metric because it allows for reinvestment with reduced impact on the balance sheet. The balance sheet highlights include increased cash, current, and total assets, flat to slightly reduced liability, low leverage, and an 11% increase in equity. Leverage is ultra-low at 0.1X equity, so the company can sustain its growth initiatives indefinitely.
Guidance is also favorable to the Shopify market, outpacing the consensus reported by MarketBeat and likely to lead analysts to positive revisions. The company raised its Q4 revenue target to the mid-to-high 20% range, with profit dollars and FCF margin expected to grow at similar rates to Q3.
Analysts Sentiment for Shopify is Warming in 2024
The analysts' trends support the Shopify stock price in 2024. Although the price target lags the market significantly, the sentiment rating and price target are improving. The sentiment has risen to Moderate Buy from Hold in the last twelve months, and the price target is up by 24% and likely to continue rising over the next twelve.
Institutional activity aligns with the analysts' trend. As a group, the institutions reverted from selling to buying in 2024, with net activity bullish all four quarters of the year. The institutions own about 70% of the stock, providing a significant tailwind for the price action.
The Technical Outlook: Shopify Melts up With Ample Room to Run
The price action in SHOP stock surged more than 25% following the Q3 release and is likely to head higher. The market broke above a critical resistance point, indicating a complete reversal in sentiment likely to take this eCommerce stock back to its all-time highs. Critical resistance points are $141 and $160, which will likely be reached in early 2025. The longer-term outlook is for Shopify stock to hit new highs and continue trending higher as it deepens penetration of its services, grows its user base, and builds on the leverage gained in 2024.
