I plan on finishing Block and NET earnings coverage for Saturday’s News of the Week article. That article will also include a Disney review, as well as Cava, Spotify, On Running and Sea Limited reviews. For now, I wanted to include snapshots of the reports that have already been released in this article.

I sent a snapshot of the Block earnings results in the most recent News of the Week article. I didn’t have time last week to cover the shareholder letter or earnings transcript. I found time to read the letter, and wanted to send what I already have set to publish as soon as possible.

Dorsey made credit the theme of this quarter’s shareholder letter, with a history lesson that I found useful. The company started off with merchant credit and its “Square Loans.” It offered broader access, transparent fees and a seamless ability to automatically repay loans with portions of sales. Sellers responded quite positively to this recipe, which makes sense considering they enjoyed 6% faster growth than non-borrowers. Retention for cross-sold customers also rose by 15% and products per borrower more than doubled to 3.7 as a result of this launch. In turn, added engagement meant more customer data to build richer profiles, with systems in place to ensure those insights are mined and understood in real time. This all means better underwriting and an aggregate 3% loss rate since inception a decade ago.

From there, Block expanded into consumer-facing credit with the launch of Cash App Borrow and the $29 billion purchase of Afterpay. Cash App Borrow offers micro-loans for up to $200 to help with bills or day-to-day expenses. It delivers a 13% boost to customer inflows and a 6% boost to transactions. Afterpay is its Buy Now, Pay Later (BNPL) platform that also delivers large boosts to customer engagement and lifetime value. This product will be integrated right into its debit card in the near future to offer what Block sees as a “better alternative to credit cards.” Similarly to its strong 3% loss rate on the merchant side, its aggregate BNPL and Cash App Borrow loss rates are 1% and 3% respectively.

On a related note, Block disclosed new return metrics that look excellent, while also telling us they can get even better. Some of that improvement will come from balance sheet optimization, as it does have some expensive warehouse credit reliance, and can shift that to cheaper deposits within Square Financial Services (SFS). Return optimism is also related to having engaged customers in an overarching product suite and the coinciding deeper borrower knowledge/data that entails. They’ll just keep getting more precise with underwriting borrowers.

Cash app gross profit rose by 21% Y/Y and drove the outperformance in this metric for the quarter. Monthly actives delivered $75 in gross profit per month vs. $65 Y/Y. Furthermore, Cash App Card actives rose 11% Y/Y and transacted 6 times on average. That rose, but the degree of growth was not quantified. Its priorities of growing inflows per active and paycheck deposit actives remain unchanged. It thinks it has a recipe of value to drive broader inclusion; anecdotes like 72% of its customers being Gen Z or Millennials vs. 57% on average support this notion. It also thinks its products can drive healthier customer finances, which should benefit overall spend volumes for Block.

On the commerce side, its Cash App Pay checkout product and digital wallet continued to “meaningfully grow volume and actives.” That’s despite most growth at this point coming from organic word-of-mouth channels. Cash App now plans to jumpstart marketing campaigns to build awareness. Other ways to quickly build awareness and adoption for this are through a partnership with large gig-economy players like Lyft, which was recently announced.

Similarly to Cash App Pay, it’s ready to accelerate marketing spend for its direct paycheck deposit business as well. It changed the app interface to make this offering, including a 4.5% savings yield and overdraft protection, more visible on the app. Just like for all other financial service firms fighting for direct deposits, winning these types of relationships with customers has a profoundly positive impact on engagement and retention metrics.

Square consolidated all administrative back office tools into a new dashboard app. Somewhat similarly to Shopify (not as broad, but deeper for financial services), this offers a unified suite for business management. As a next step here, it’s also beta testing a new app interface that aims to aggregate all point-of-sale tools — from processing to digital wallet integrations to inventory management — into a single page. It wants to make its product even easier and more obvious to use. Lower friction means more volume, which means more profit.

As part of the overarching orders platform for merchants like restaurants and bars, it added software-based bar tab functionality. This builds on last quarter’s Square Kiosk release, which is a full-service platform for ordering software and point-of-sale hardware.

To augment go-to-market, it signed a new partnership with T-Mobile. This will make SQ’s commerce offerings more visible to businesses when they’re purchasing plans from the telecom giant. It partnered with another telecom player in Japan, along with Mercari’s fintech business (called MerPay) and a large card network there too. In France, its new strategy to empower third-party sales organizations is working. 50% of its new sales there are now externally driven, and it’s looking to emulate this success in other geographies. It also signed a distribution deal with the Restaurants Association of Ireland. As you can tell, channel partnerships continue to become an increasingly important source of growth.

It’s also working hard to become more of a primary financial service vendor for its merchant base – just like on the consumer side. Its bank attach rates with merchants are rising, thanks to new onboarding flows for its Square Debit Card. It also finished launching a new Bill Pay integration for this product, to make expense management all the more convenient.

I will offer my view of the quarter when I finish getting through all of the materials. As of now, it didn’t look amazing or terrible. Pretty average. More to learn.

EPS is expected to grow by 142% this year and by 15% next year.

Following the post-earnings pop and likely upward profit revisions, these forward multiples are probably going to be roughly accurate. EBITDA is expected to grow by 58% this year and by 27% next year.

Reiterated mid-20% Y/Y e-commerce growth for the year. EPS is expected to grow by 146% this year and by 75% next year.

EPS is turning positive this year. EPS is expected to grow by 42% next year and by 24% the year after.

My Shopify Deep Dive can be found here. Most of that is still current, except for the financials, which are updated in this review. A review of its most recent Investor Day can also be found here.

The Y/Y GPM contraction for merchant solutions was related to lapping non-cash revenue from strategic partners last year. It has now finished lapping this comp headwind. GPM also was hurt by rapid Shopify Payments growth, which is dilutive to GPM but not EBIT or FCF margins due to lower OpEx intensity. A mix shift to larger merchants and from debit to credit for payment methods also hurt GPM a bit.

GAAP operating expenses (OpEx) rose 7% Y/Y and 13% Y/Y, excluding 2023 real estate impairment charges. The rise was due to more compensation costs, more marketing spend and losses related to Shopify Capital and Payments growth. Notably, loss ratios across its credit products are stable, so this is truly related to more originations. Overall, GAAP operating expenses were 38.6% of revenue vs. 45.4% Y/Y and compared to its guide of 41.5% of revenue. Lower-than-expected marketing spend was the primary cause of this. Really good. Especially when pairing this with the large revenue beat.

Shopify removed all data in its press release on adjusted income statement costs and margins. This loudly depicts their newfound focus of controlling stock compensation. I loved this.

Shopify expects revenue growth in the mid-to-high 20% range. This beat 23% Y/Y growth estimates materially. It also expects about 24% Y/Y gross profit dollar growth. That is better than expected, with the implied margin being roughly as expected. Its GAAP operating expenses as a percentage of revenue are expected to be 32.5% vs. 36.5% expected. Really good. Finally, it guided to a 21% FCF margin vs. 17% expected. This represents a large FCF beat, considering the material revenue guidance beat. The combination of a large revenue beat and outperforming cost efficiency should yield some rather explosive upward profit revisions.

The explosive FCF margin expansion we’ve seen from cutting inefficiency, logistics and other low value costs will likely slow down: 

“I think we've now struck a very good balance in terms of free cash flow margin and investing back into the business to sustain the long-term growth of the business… I don’t think we’ve topped-out FCF margin, but that’s unclear.”

CFO Jeff Hoffmeister

Note that SHOP’s forward PE will likely be closer to 70x-75x as we move another quarter into the future and upward profit revisions unfold. EPS is expected to grow by 51% this year and by 24% next year.

For a few years, we’ve been talking about Shopify getting serious about winning Fortune 500 enterprise customers. Its Shopify Plus product offers a more advanced subscription tier, with Managed Markets, Shopify Flow, deeper reporting, more scalability etc. It pairs this with Commerce Components by Shopify (CCS), which is its à la carte-style purchasing option for merchants. It can help do things like go from “handshake to full implementation” in 3 weeks for clients.

This is all made wonderfully easy by its online store 2.0, which debuted in 2022. This deploys a lego-lick approach to website-building, with “app blocks” that are portable and configurable across all pages… with little to no coding. That’s deeply popular for older legacy brands that don’t want to rip and replace all at once, as it means they can migrate at their own pace with little disruption. The bigger you are… the most costly disruption becomes.

Thirdly, its “headless commerce” product enables the separation of front-and-back-end architecture. That means more scalability and deeper customization for merchants with the most commanding needs. As it built this roster of products to win big brands like Netflix and OnRunning, it also changed course by finally embracing request for proposal bidding processes. From there, it worked more closely with system integrators like Accenture to diminish selling friction and turbocharge momentum.

All of this work has been done over the last 3ish years, and this quarter seems to be its coming out party. It signed 16 large enterprise brands during the period, including Hanes, Reebok, Off-White, MeUndies, Joann, Lionsgate, Victoria’s Secret and more. Selling points, like lower total cost of ownership and checkout performance leads, are resonating. Most recently, it created a new data migration tool. This allowed a large brand to migrate all of its needed data in 3 minutes and 4 clicks. Wow. Still, leadership calls this enterprise opportunity very nascent, with the financial contribution ramping throughout 2025.

Shopify Payments is a native payment gateway for merchants, and it’s also a processor via partnerships. It was initially launched simply to allow merchants to avoid using suboptimal third parties and to drive broader interoperability, deeper data sharing and better authorization rates. It has since turned into a large profit driver for the company. The suite offers merchants a wide-range of alternative payment methods (APMs), including its own checkout accelerator called Shop Pay. During the quarter, Shopify Payments GPV rose by 31% Y/Y while Shop Pay GMV rose by 42% Y/Y.

Point of sale (POS) is another key piece of its payment toolkit. It offers a slew of software products that allow physical stores to emulate the convenience and efficiency of online settings. Shopify’s obsessive work to create a single, unified platform means this offline channel can communicate with the rest of the firm’s business in real-time to improve ordering processes, customer service etc. It’s all about doing the tedious work to let its merchants focus on growing rather than maintaining.

This quarter, as it grows more confident in its offline offering being as world-class as online, it leaned into more marketing spend. The decision led to multi-location POS merchants growing 50% Y/Y. Wins here included Akira, Billy Reed and Lora.

Offline success was also aided by adding POS in Australia, Germany, Netherlands and the UK, as well as Tap to Pay functionality for Android-powered merchants. They’re excited about this Android unlock. The team sees this driving experience parity across the globe (with Apple and Google Pay) to give it even stronger footing in its quest for winning volume. And now, Shopify offers this functionality while giving merchants the aforementioned elite experiences they’ve come to know and love within digital settings. This eliminates a rare competitive advantage that others enjoyed over Shopify.

Shopify’s consumer-facing shopping app debuted a new “merchant-focused” home page. This incorporates partner GenAI models and its own AI work to more intelligently surface recommended brands. The change has already raised recommendation engagements by 18%. Much more work planned for improving targeted search and discovery with this new technology.

Shopify Flow is the company's low-code template for building automated workflows. It enables enterprise-level scalability, without fixed costs directly scaling with growth. It allows merchants to do more with less. This quarter, it added new automation triggers that pull more directly from a merchant’s first party data and added 304 new workflow automation actions as well. To the team, this makes “Flow a more powerful tool.”

Shopify Inbox is an AI-powered email tool to handle routine customer service inquiries. This is already being used for half of merchant responses, and is having a positive impact on response time, which means higher conversion rates.

Shopify Tax is also going a lot deeper. It debuted new automations to fully handle “filing and remittance” right from the singular admin. Upon observing the large headache that cross-border taxation brings, it raced to add this product in the UK and the “entire EU.” This comes with automated value-added taxation to eliminate the real risk of merchants unknowingly violating complex compliance rules around the globe. Again… whatever it can do to let merchants focus on growth rather than maintenance. That, in turn, means more merchant volume and more Shopify success. Aligned interests are a wonderful thing.

A case study came out from EY during the quarter. In it, the consulting giant concluded that Shopify Managed Markets (turn on new countries for fully managed selling with the click of a button) delivers an 83% boost to countries sold per merchant. More notably, it boosts merchant international sales growth by 40% or more. For the top 100 merchants using this product, the boost was closer to 200%. Harley called that “incredible.” I’d have to agree.

B2B commerce has also emerged as the next glaringly obvious growth vector for Shopify. Gotta love virtually endless total addressable markets (TAMs) and elite teams capable of capturing the vast opportunities. Volume for this segment rose 145% Y/Y to surpass 100% growth for the 5th straight quarter. New offerings like by-customer discounts, draft orders, new B2B Shopify Flow automations and custom bundles are all working. Most of this growth has come from its typical merchants who simply want to add this dedicated channel. Interestingly, it has begun pursuing other sectors where B2B is popular (industrial hardware, automotive parts etc.) and is enjoying some early wins there.

In Shopify’s never-ending quest to let merchants sell anywhere, it was added as Roblox’s first commerce partner and as a new member of the YouTube Shopping Affiliate Program.

“There's nothing in what we've heard from Trump nor would there have been anything from Kamala, which we think impacts the overall state of just new business formation and entrepreneurship.”

CFO Jeff Hoffmeister

Phenomenal quarter from a phenomenal company and a phenomenal team. There is nothing to do but praise this elite performance. As Max readers know, I loaded up on this name throughout 2023 and loaded up again during the August 5th Japan Carry Trade event. Those transactions were shared as they happened (as always). This week, I trimmed 10% of the position this week as a response to multiple expansion. The forward multiple moved from around 40x through 2023 to around 70x heading into the report. In that note, I talked about this quarter likely being excellent, but perfection being absolutely necessary given the rising valuation and overwhelmingly positive sentiment. The setup was similar to Duolingo and The Trade Desk.

This was absolutely perfect in every way shape and form. It was so good, that this 25% move probably won’t even mean any further multiple expansion. I expect large upward profit revisions to keep the multiple around where it is and would like for everyone on that team to take a well-deserved bow. The only caveat is that this team will need to stay perfect going forward to continue earning this premium valuation like they so clearly are today. Again, I’m more comfortable assuming that for this team (and The Trade Desk) than any other name that I own. I’m not trimming any more shares here, despite it now being one of my three largest holdings. If I didn’t trim yesterday, I’d likely be doing so today.