Financial News
Shopify Begins Layoffs
Shopify stock fell after the e-commerce company announced it will lay off approximately 1,000 employees, or 10% of its global workforce, as its CEO accepted responsibility for a flawed growth strategy. SHOP stock has dropped more than 80% this year, including Tuesday’s loss.
Shopify (SHOP) fell 14.1 percent today to close at 31.55 on the stock market. The beleaguered e-commerce company reports second-quarter earnings on Wednesday morning.
Shopify’s revenue growth has slowed for four consecutive quarters as the coronavirus pandemic fades and online shopping returns to normalcy.
Shopify CEO Accepts Responsibility
Tobi Lütke, CEO of Shopify, apologized in a blog post for overestimating the company’s growth.
“We bet that the channel mix — the proportion of dollars spent on ecommerce rather than physical retail — would permanently leap ahead by 5 or even 10 years,” Lutke wrote. “We couldn’t know for sure at the time, but we knew that if this was true, we’d have to expand the company accordingly.”
He continued: “It is now clear that the wager did not pay off. What we’re seeing now is the mix returning to roughly where it should be at this point based on pre-Covid data. Still growing steadily, but not by much in the last five years. Our market share in ecommerce is significantly higher than in retail, so this is significant. Finally, it was my decision to place this bet, and I erred. We must now adjust. As a result, we must say farewell to some of you today, for which I apologize deeply.”
According to a Wall Street Journal report, shareholders recently approved Shopify’s board of directors’ plan to increase Lutke’s voting power to 40% from 34%.
Prior to the job cuts, analysts predicted that SHOP stock would re-accelerate revenue growth in 2023, despite concerns that the US economy would enter a recession.
Shopify creates e-commerce websites for businesses and collaborates with third parties to handle digital payments and shipping.
The majority of Shopify merchant customers cater to the consumer market. Shopify, on the other hand, intends to expand into business-to-business commerce.
Shopify is constructing a distribution network in the United States to store and ship products for its merchant customers.
The company recently paid $2.1 billion for fulfillment operator Deliverr.
“Given management’s commentary today, we believe it is likely that the company will reduce the pace of its investments through the remainder of the year as expenses are realigned to better match demand,” Stifel analyst Scott Devitt said in a report.
According to him, the majority of layoffs will occur in the recruiting, support, and sales units.
Alphabet, the parent company of Google, is one of Shopify’s partners (GOOGL). Shopify has also collaborated with Google’s YouTube.
Shopify’s earnings for the second quarter are due early Wednesday. Analysts expected revenue growth of 19% for SHOP stock, down from 22% in the March quarter.
Will the June quarter be a low point?
Wall Street forecasts revenue growth of 26 percent in the September quarter and 28 percent in the December quarter.
That’s a significant drop from Shopify’s all-time high. Its revenue increased by 86% in 2020 and 57% in 2021. While growth is expected to slow to 24 percent this year, sales are expected to increase by 29 percent in 2023, according to consensus estimates.
In a second-quarter preview, Truist Securities analyst Terry Tillman said, “We believe 2023 will be a pivotal year in terms of early indicators of payoff from strategic growth investments.” “The Street and we anticipate a material acceleration in growth into 2023.”
Analysts predict Shopify will earn 8 cents per share in 2022 and 21 cents in 2023, compared to 64 cents per share in 2021.
According to RBC Capital Markets analyst Paul Treiber, Shopify’s second-quarter revenue may fall short of analyst expectations. In addition, the company may cite currency exchange rates as a factor, according to a report. The value of the US dollar has risen.
Evercore ISI stock analyst Mark Mahaney is also wary of Shopify.
“Based on intra-quarter data points, we believe the Street’s current Q2 and Q3 revenue estimates are reasonable, with slightly greater downside variance,” Mahaney said.
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