Earnings Roundup: Shopify, Alphabet, and Pinterest

For the second quarter in a row, Alphabet posts record revenue. Shopify hits an all-time high after everything in the first quarter goes up. Pinterest falls 12% despite better-than-expected results in Q1. Motley Fool contributor Brian Feroldi analyzes those stories and highlights the appeals of YouTube.

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Chris Hill: It’s Wednesday, April 28th. Welcome to MarketFoolery. I’m Chris Hill. With me today, Brian Feroldi in the house. Good to see you.

Brian Feroldi: Good to be back, Chris.

Hill: We have the latest from Pinterest and Shopify, but we’re going to start today with the behemoth that is Alphabet. Shares of Google’s parent company up 4% and hitting an all-time high this morning. First-quarter profits were much higher than expected. Alphabet’s revenue was north of $55 billion. There is a lot to get to with a company of this size. Where do you want to start, Brian?

Feroldi: Well, let’s start with that top line that you just mentioned. Not only was it $55 billion, that figure was up 34% when compared to the year-ago period. That is enormous growth, and $55.3 billion just blew past Wall Street’s estimate of $51.7 billion. If you dig into the details of that number, basically, everything worked for Google this quarter. Search revenue was up 30%, YouTube advertising revenue was up 50% to $6 billion, networking revenue up 30%. Even their other revenue which includes Google Play and YouTube non-advertising revenue, so if you’re a paying subscriber like I am to YouTube, that was up 46%, was boosted a little bit by the Fitbit acquisition, which did close this quarter. Other Bets, it grew to a very modest $198 million, which is a rounding error for the company. But across the board, there was strength.

Hill: I want to get back to YouTube in a second. But first, you talked about the top line, and this is the second quarter in a row that Alphabet has put up record revenue. You think back a year ago this time, one of the big stories with respect to partly Facebook, but definitely Google, was the travel industry shutting down, and the travel industry shutting down their marketing budgets. You had companies like Expedia coming out and saying, “Normally, we spent $5 billion a year in advertising, this year we’re going to cut that by 80%, at least.” The impact for businesses like Google was real and significant. The fact that they put up record revenue for the second quarter in a row — and I know that travel is starting to come back, but if you just think back six months ago — it really speaks to how good these people are at their jobs that they were able to make up for that and put up record revenue two quarters in a row.

Feroldi: It is amazing, and to your point, it’s not like in the year ago quarter, if you rewind the clock one year, Google’s growth was much slower than it was this quarter, but it still grew its top line 13%, despite all the headwinds that you just mentioned. It’s incredibly impressive that this company was able to post this kind of growth, even off of that base. I definitely think that travel agencies and travel companies are going to start to ramp up their spending. But it just shows how big, how diversified, and how many growth levers this company has.

Hill: You mentioned the YouTube revenue around $6 billion. They’re forecasting for this fiscal year, it’s going to be in the neighborhood of $30 billion in revenue for YouTube. That is also roughly what Netflix is targeting for revenue this fiscal year. I’ll just point out that Netflix has a market cap of $225 billion. What do you think when you see YouTube putting up these numbers? Because as big as YouTube is, it really has been a long time that Google, by its own admission, has been — maybe “struggling” is too strong a word, but has been still in the process of figuring out how to monetize YouTube in the way that it has with Google. It’s amazing to see where it is right now.

Feroldi: It really is. YouTube is a crown jewel in this company’s massive empire, Chris. I know in my household, if you ask everyone in my family, you can only have one subscription service. What is it? All five of us would say YouTube without question. We would get rid of everything else before we get rid of YouTube. That seems to be a pretty universal opinion. YouTube now has more than 2 billion monthly active users, and over 1 billion hours are watched on YouTube every single day. It’s just a monster. The company is a master at figuring out ways to monetize it, both through the advertising and through the subscription platform. I think YouTube has an incredibly bright future ahead.

Hill: Shopify’s first quarter was pretty much everything you could hope for if you were a shareholder. Profits and revenue were higher than expected. Gross margins were up, gross payment volume was up. Everything that’s supposed to be up was up with Shopify, and the stock up 10% today.

Feroldi: Yeah. You could say “up,” that would be under selling it by just a little bit. When you dig into the details, this company is unbelievable. Gross merchandise volume grew 114% to $37 billion. Gross payment volume grew 137% to $17 billion. Total revenue here grew 110% to $989 million. For comparison, Wall Street was only expecting $865 million, so that is a substantial beat on the top line.

The company really translated that success down the rest of the income statement. Gross margin was up 200 basis points to 56%. Adjusted net income was $254 million. That was up more than tenfold over the prior year — and as a funny side note here, the company’s GAAP net income was actually $1.3 billion. That was higher than revenue. The difference there is because it recorded an unrealized gain of $1.3 billion on its equity investment in a firm. So pick a metric. It looked great.

Hill: I’m not looking to hate on Shopify, I’m genuinely curious, though. Was there anything that they did in this quarter that you look at and thought, “That wasn’t quite up to snuff. It’s one part of the business that maybe they’re hanging their head because they weren’t doing as well as the others.” Because I didn’t see anything.

Feroldi: You have to really dive deep to find anything to be upset about. Yes, they probably… One thing that did so is they are investing heavily back into their business to grow their fulfillment network and build out their app. They actually put it out that their app now has 107 million registered users, 24 million of which use the product each month, but this is a company that is, to borrow a Ron Gross phase, firing on all cylinders. It’s hard to find any flaws here.

Hill: Last thing before we move off of Shopify. What do you say to people who look at Shopify’s P/E ratio that is now in the neighborhood of 500? What do you say to people who just look at this business and say, “I get it. They are firing on all cylinders.” This is not a cheap stock, to say the least.

Feroldi: That’s easy. I say it’s the wrong metric, you’re not looking at the right metric. Shopify is not yet optimized for profits, Chris. If it’s not yet fully optimized for profits, the E, the earnings are therefore depressed. They would be higher if Shopify was optimized for profits. Well, if the earnings are depressed, what does that mean the P/E ratio is going to do? It’s going to be artificially looking high. I’m not going to argue for a second that Shopify is cheap. No way. This company is priced extremely, the valuation here is very high. But I will say, if you’re looking at P/E ratio, that’s a little bit shortsighted, in my opinion.

Hill: Two quick things before we move on to our final story. Just a programming note. This is a short week for MarketFoolery. We won’t have an episode tomorrow. However, Motley Fool Money this week is going to be earnings-palooza. We’re talking about these three companies: Microsoft, Starbucks, Spotify. Those are three companies that we’re going to hit on Motley Fool Money that we’re not going to be able to hit today on MarketFoolery.

Secondly, speaking of stocks, if you haven’t already, check out our flagship service, Stock Advisor, you get stock recommendations from Tom and David Gardner. You get their Best Buys Now and a lot more. Go to stockideas.fool.com and you get 50% off for being one of the dozens of listeners. Again, that’s stockideas.fool.com.

It’s not all sunshine and rainbows today out there in the stock market for anyone who thinks otherwise, because shares of Pinterest are down 12% this morning. Despite the fact that first-quarter profits and revenue both came in higher than expected, I’m wondering if the drop we’re seeing today is a combination of guidance along with the fact that this is a stock that has more than tripled over the past year.

Feroldi: I think that’s exactly what is going on. We are getting to the guidance in a bit, but looking backwards, it’s hard not to be happy about everything this company just reported. Global monthly active users grew 30% to 478 million. The company noted that it had particular strength coming from users under the age of 25. That is music to an advertiser’s ear. Average revenue per user also grew 34% during the quarter to just over a dollar. Combining those two things together, revenue was up 78% to $485 million. That also beat Wall Street’s expectations of $473 million, and it was also better than management’s guidance of “growth in the low 70s.” Margins enhance all the way down the income statement. Non-GAAP net income for the quarter was $78 million or $0.11 per share. That also exceeded Wall Street’s guidance of $0.07. So if you’re just looking at the headline numbers, it looks good to me.

Hill: What do you think of the guidance?

Feroldi: That is going to be the tricky thing that I think market watchers are looking forward to. If you look at what the company is expecting for revenue in the upcoming quarter, they’re predicting 105% revenue growth. That sounds good. That sounds like the story here is still on track. I think what the market is getting caught up on is the monthly average user guidance. They are only predicting global monthly average users to grow in the mid-teens range, and if you take that apart, they said that growth in the U.S. is going to be flat on a year-over-year basis. I think Wall Street is looking at that maybe this company has saturated the market in the U.S. much sooner than it was anticipating, and users monetize in the U.S. at a far higher rate than they do in international markets. I think that is what’s taking off a couple of points up the stock today.

Hill: When you look at it, this is a company that, again, hard to find problems with the quarter they just put up. When you look at the drop in the stock, if you’ve got a time horizon of 5 years, 10 years, like down 12%, is that a stock that looks like it’s on sale too you? Like one of those situations where if you liked it yesterday, good news, it’s 12% cheaper today.

Feroldi: Yeah, that would definitely be the way that I would interpret that. When you dig deeper into what the company said on the conference call, it’s very clear this company is heading in the right direction. They did note that they launched or have made significant enhancements to their partnerships with companies like Shopify and Automattic’s WooCommerce, that also started to launch advertising business in their first Latin American market, Brazil.

More importantly, they noticed that the number of Pinners, that’s their users, that are engaged with the shopping platform grew 200% year over year, and product-related searches grew 20 folds year over year. That tells me that more Pinners are viewing this platform as a place to go shopping and not just a place to go for ideas. When you combine that with the total growth in global monthly average users, I think there is tremendous room for this company to increase its ARPU overtime.

Hill: Last thing and then I’ll let you go. You talked about how beloved YouTube is in your home. Does anyone in your home use Pinterest? Because it’s one of those things that I struggle to understand because I’m not interested in it and I’m not going to set up an account even though there are people in my home who love Pinterest.

Feroldi: The answer there is yes. This is my wife’s favorite company on earth and has been for years. I knew five-plus years ago, as soon as Pinterest came public, I’m buying, if for no other reason that it gives me an excuse to talk to my wife about a company that she loves. But the more I dig into this platform, the more I really think that this is the platform that just makes so much sense for advertising. When people go to Pinterest, they are looking for ideas. They don’t know how to put it into words, but as soon as they see an image, that inspires them to do something, to do some kitchen renovation or an arts-and-crafts project. To me, that is a natural extension to, “Oh, here’s something that inspires me. I have to buy blank item in order to do that thing.” That makes Pinterest a highly shoppable platform, especially when you compare it to Facebook or Twitter, where ads are a distraction. They are part of the Pinterest experience. That’s one reason why I’m a shareholder and might be heading up for some more this week.

Hill: Brian Feroldi, great talking to you. Thanks for being here.

Feroldi: Thanks, Chris.

Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don’t buy or sell stocks based solely on what you hear. That’s going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I’m Chris Hill. Thanks for listening. We’ll see you on Monday.