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As Shopify's (SHOP) growth has skidded lower following a boom period during the height of the pandemic, the e-commerce company has worked to "reshape the business", as CEO Harley Finkelstein describes it, and the benefits of those efforts were evident in last night's better-than-expected Q2 earnings report.

• Despite the challenging macroeconomic backdrop, gross merchandise volume (GMV) grew at a healthy rate of 18% (in constant currency) to $55.0 bln, paving the way for SHOP to comfortably exceed revenue expectations.
• Meanwhile, SHOP's cost-cutting actions -- including a 20% workforce reduction that was announced last quarter -- and the divestiture of logistics business pushed gross margin higher by 180 bps qtr/qtr to 49.3%.
• Along with the outperformance on the top-line, SHOP's improved margins helped it to surpass EPS estimates for the third quarter in a row.

Beating analysts' estimates is a definite plus, but what really stands out to us is the reacceleration in SHOP's growth rates.

• In Q2, revenue growth reached nearly 31%, up from the low-to-mid-20% growth SHOP achieved in the 3Q22-1Q23 timeframe. While SHOP's Q3 guidance calls for a slight slowdown to 25% growth (excluding the impact from the sale of the logistics business), it's worth noting that the company has handily topped revenue expectations in each of the past four quarters.

There are a couple primary drivers behind SHOP's stronger growth.

• First, the company is experiencing higher attach rates across its merchant platform with business owners tacking on additional services like payments, installments, capital, and taxes. In Q2, SHOP's revenue attach rate was 3.08% compared to 2.76% in the year-earlier quarter.
• Second, SHOP implemented a price increase at the end of April and merchant retention has been more robust than it anticipated. As a result, Subscription Solutions generated strong revenue growth of 21% to $444 mln while Monthly Recurring Revenue (MRR) jumped by 30% to $139 mln.
  • The price increases are expected to continue benefiting the Subscription Solutions business and MRR for the remainder of the year.

Even as SHOP's revenue growth accelerates, the company is still taking a cautious approach with spending as it moves towards an asset light model.

• On an adjusted basis, operating expenses declined by 3% yr/yr to $818 mln, primarily due to lower marketing spending. SHOP plans to keep a tight lid on expenses in Q3, too, forecasting expense dollars to be flat to up slightly compared to Q2.

Considering all this good news, it is surprising that the stock is trading sharply lower today. We believe this is mainly a function of traders locking in gains after the stock rallied by 35% since its last earnings report. Furthermore, stocks with rich valuations such as SHOP -- its trailing P/S is roughly 15x -- are easy targets when the market becomes more volatile. Overall, though, the fundamental picture continues to brighten for SHOP and we believe the stock could rebound when market conditions improve.