When e-commerce firm Shopify reports fourth quarter earnings on Tuesday, upside could come from a source under the radar of many investors. Shopify stock should get a boost from the company's new partnership with digital payments firm PayPal Holdings.
Shopify earnings are due before the market open on Tuesday. Analysts forecast EPS of 43 cents, up 28%, with revenue growing 27% to $2.73 billion. Gross merchandise volume from merchant transactions is expected to grow 24% to $93 billion.
The December quarter is usually Shopify's best quarter annually because of the holiday shopping period. In December, Shopify preannounced e-commerce data following the Thanksgiving holiday (Black Friday/Cyber Monday).
In the fourth quarter, analysts expect Shopify to get a boost from its push into the "enterprise" market. With roots in the small business market, Shopify has recently targeted large companies with e-commerce software and services.
Revenue Recognition Change
Further, Shopify also could get a boost from an accounting change involving revenue recognition related to its PayPal partnership. Shopify will recognize sales from PayPal transactions on a gross revenue basis rather than net revenue.
"Further, the accounting change on the treatment of revenues coming to Shopify through the PayPal button (from net to gross) should bolster growth, though management continues to speak to benefits ramping more materially in 2025, as the mechanical change flows through the U.S. merchant base," said Morgan Stanley analyst Keith Weiss in a recent report.
Shopify offers its own online checkout button for consumers and has used Stripe to process transactions for merchants on its e-commerce platform.
According to UBS, the Shop Pay button accounts for about a quarter of Shopify's gross merchandise volume.
On Sept. 9, Shopify and PayPal announced that PayPal would be another online credit and debit card processor for Shopify Payments in the U.S. Wall Street analysts say Stripe will still handle the majority of transactions. Shopify is an investor in Stripe.
At Deutsche Bank, analyst Bhavin Shah in a report noted that Shopify management has stated that the PayPal accounting change should modestly increase gross profit dollars, though gross margins could be a bit lower.
Shopify Stock: Technical Ratings
Founded in 2004, Shopify launched its initial public offering in 2015. In 2023, the company sold its delivery and logistics business to Flexport, easing investor angst over rising capital spending.
Further, the e-commerce stock holds a perfect IBD Composite Rating of 99, according to IBD Stock Checkup.
IBD's Composite Rating combines five separate proprietary ratings into one easy-to-use rating. The best growth stocks have a Composite Rating of 90 or better.
PayPal on Feb. 4 reported earnings that topped views but shares fell on the company's revenue outlook.
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on artificial intelligence, cybersecurity and cloud computing.
