Shopify: SHOP Delivered

May 4, 2016 MORGAN STANLEY & CO. LLC SShhooppiiffyy Brian Essex, CFA [email protected] +1 212 296-5569 Brian Yun [email protected] +1 212 761-3555 SHOP Delivered Ivan P Holman [email protected] +1 212 761-2534 Stock Rating Industry View Price Target Shopify Inc ( SHOP.N, SHOP US ) Overweight Attractive $34.00 Software / United States of America Stock Rating Overweight Industry View Attractive Another beat with an increase in revenue guidance. Better than Price target $34.00 expected revenue growth was muted by mere reiteration of operating Shr price, close (May 4, 2016) $29.61 Mkt cap, curr (mm) $2,663 loss guidance as acquisition related expenses and currency are 52-Week Range $42.13-18.48 expected to offset revenue upside this year. Reiterating our OW rating FFiissccaall YYeeaarr EEnnddiinngg 1122//1155 1122//1166ee 1122//1177ee 1122//1188ee with a $34 price target. ModelWare EPS ($) (0.26) (0.51) (0.36) (0.12) Unless otherwise noted, all metrics are based on Morgan Stanley ModelWare KPI strength drove revenue well over expectations. SHOP reported revenue framework e = Morgan Stanley Research estimates growth of 94.7% y/y in 1Q, meaningfully above MS and Street expectations. Record merchant adds in a seasonally softer 1Q (275k total merchants, 32k net new merchants) drove upside to key performance metrics in the quarter. SHOP benefitted from additional marketing spend in new sales channels as well as merchants drawn to the platform because of its social media integration. Subscription Solutions accelerated to 73.2% y/y compared to 70% last quarter and Merchant Solutions grew 126.8% y/y in the quarter versus 139.9% in 4Q. GMV exceeded expectations, growing 102% y/y to $2.7bn vs. MSe of $2.5bn. Take rate for Merchant Solutions increased q/q to 127bps versus our estimate of 121bps. Revenue guidance raised but investors focused on spending. SHOP raised FY16 revenue guidance to $337-$347mm with 2Q revenue guidance of $79-$81mm, both over consensus and our expectations. Sustained strength in merchant adds, GMV growth in a seasonally weak quarter and healthier GMV take rate were key factors for the increased revenue guidance. While the revenue outlook is positive, SHOP reiterated operating loss guidance, which remained at $16-$22mm for FY16. This, along with the reiteration of a 4Q17 target for non-GAAP operating profitability, drove investor concern that future revenue upside may not flow directly to the bottom line. We recognize investor preference for a faster timeline to profitability but see the company's effort to drive merchant growth and maximize platform value as the right long-term move. Update on key initiatives. 1. Infrastructure: SHOP continued to evaluate data center options in Europe, has increased office space in Toronto and expects to do the same in Ottawa in 2Q. Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a 2. Developing merchant and partner engagement: SHOP's Unite result, investors should be aware that the firm may have a conference saw the launch of new software developments kits, conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider enabling better product development capabilities for partners Morgan Stanley Research as only a single factor in making their investment decision. and leading to more merchants to the platform (see SHOP: For analyst certification and other important disclosures, UNITE Partner Conference Takeaways). SHOP continues to refer to the Disclosure Section, located at the end of this report. launch new products to spur merchant growth (see Shopify Capital). 1