Shares of Shopify (SHOP 21.57%) were up 21% as of 10:14 a.m. ET on Thursday following a better-than-expected third-quarter earnings report.
Third-quarter revenue of $1.7 billion was marginally higher than analysts’ estimates and represented an increase of 25% over the year-ago quarter. The top-line beat affirms the momentum Shopify has been building in recent quarters, which has 70% year to date.
Why investors loved Shopify’s third-quarter earnings report
More businesses are signing up for subscriptions and driving steady growth in the company’s merchant solutions business. But the stock is also responding to Shopify’s improving profitability on the bottom line.
Operating income came in at 7% of revenue, or $122 million, reversing last year’s operating loss of $346 million. The company’s decision to sell its logistics operation to free up resources and lower expenses is clearly paying off, and shareholders are being rewarded.
Management expects the momentum to continue with the holiday shopping season coming up. For the fourth quarter, revenue is expected to be in the low-to-mid-twenties year over year excluding the impact of sales in the logistics business from the fourth quarter of 2022.
Moreover, free cash flow margin relative to revenue was a healthy 16% in the third quarter, and management expects it to remain in the high-teens range in Q4.
Here’s an opportunity to watch
For a stock trading at a high price-to-sales ratio of 12, Shopify hit all the right notes in its latest update. The company should continue to see healthy margins and growing free cash flow over the long term, which could push the stock to new highs.
As we enter 2024, investors will want to watch Shopify’s payments business following its Buy With Prime integration with Amazon. This should benefit Shopify merchants and lead to higher checkout conversion, which could boost the company’s revenue.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. John Ballard has positions in Amazon. The Motley Fool has positions in and recommends Amazon and Shopify. The Motley Fool has a disclosure policy.