Shopify Stock Rallies Despite Quarterly Loss

-Shopify posted a loss of $1.2 billion compared to $900 million during the same quarter of 2022.

-This included a one-time loss of $1 billion on unrealized equity losses.

-Adjusted net loss for the quarter was $38.5 million compared with the adjusted net income of $285 million during the same quarter in 2022.

-Revenue grew by 16% y-o-y, to $1.3 billion, meanwhile, GMW was up 11% to $46.9 billion.

-Shopify cut its workforce by 10%, as demand has not lived up to expectations.

“While commerce through offline channels grew faster in Q2, where our exposure is lower but growing, we continued to see increased adoption of our solutions, enabling our merchants to remain agile against a challenging macro environment and highlighting the breadth and resilience of our business model,” said Amy Shapero, Shopify’s CFO.

Shopify NYSE: SHOP is an e-commerce and merchant solutions company based out of Canada. The stock was up 6% after reporting earnings, despite the significant loss for the quarter.

Shopify’s business witnessed mixed results during the quarter

Shopify’s revenue came in slower than expected as the base effect from COVID affected the quarterly earnings. When combined with a slowdown in the global economy Shopify’s results were weaker than expected. Shopify’s business is unique, where it's neither a logistics-focused business like Amazon nor a pure software as a service (SaaS). Shopify competes with its ability to provide a superior product and is able to retain customers mainly due to the high switching costs for merchants once they’re on Shopify’s platform.  

Merchant solutions were up by 18% and uptake of merchant solutions continued to be strong. Gross margin profit grew by 6%, slower than the overall revenue growth, mainly due to a greater mix of lower margin merchant solutions, lower margin in Payments, and an increase in investment in infrastructure. Gross margins should catch up over the next 3-4 quarters as investment outlays and an increase in solutions uptake leads to a better pricing mix.

Shopify also cut its workforce by 10%, this was expected, as many companies have been cutting their workforce in recent times. But these cuts are more due to overhiring than any significant weakness in the economy. Many companies over-hired during the COVID pandemic as demand for their products increased due to lockdowns, meanwhile, other companies slashed their workforce as demand declined. The labor force is in a period where it is adjusting to this dynamic and will take a few quarters before it gets back to normal.

Operating losses increased for the quarter as well, with losses coming in at 15% versus a 12% profit during the same quarter in the previous year. The increase in losses was driven by R&D, marketing, and international expansion.

Shopify has also continued to introduce a number of key features, including improving B2B and payment functionality. It has completed its takeover of Delliver.

Outlook for 2022

Shopify should see growth increase once again as weakness from base effects comes off and an increase in merchant uptake due to a number of new solutions being introduced improves revenue in the second half of the year.  The company has currently guided towards an operating loss in the second half owing to a number of issues, including one-off costs, severance payments, capital expenditure, and stock-option-related expenses.

Shopify continues to be at the forefront of the global e-commerce merchant business. It will increasingly target countries outside of North America in order to drive revenue in the future. Currently, Shopify has very little market share in the global SME market, but continued efforts should see the company increase its market share in the coming years. Furthermore, the company remains far ahead of its competitors internationally, largely owing to the high cost of expanding services globally.

Shopify will eventually achieve higher margins due to its business not being capital intensive. Anywhere from 20-30% net profit margins are possible. But the stock currently trades at price-to-sales of 9.8, which many would consider relatively high considering the growth in the current quarter.

Shopify’s execution in the next couple of quarters and results over the next couple of quarters will determine in large part where the stock is headed, and any weakness in the outlook could see the stock quickly drop by another 20-30% from its current levels.