Shopify released disappointing first-quarter earnings that fell short of analysts’ expectations, sending the stock down on Thursday. The e-commerce company reported adjusted earnings of 20 cents a share during the quarter, a significant shortfall from estimates of 64 cents a share. Net income was reported at $25.1 million, down from $254.1 million from the same period just last year.
The poor performance included $1.6 billion in net unrealized and realized loss on equity and other investments. In attempting to explain the earnings miss, Shopify President Harley Finkelstein said that the unrealized and realized loss stemmed from the market’s volatility that took a toll on the company’s investments.
“These are very good companies and very good investments,” he said, but the stocks’ movements impacted Shopify’s bottom line. The company released sales of $1.2 billion, in accordance with estimates for $1.24 billion. Gross merchandise volume grew by 16% year over year to $43.2 billion. The company’s merchant solutions segment recorded revenues that grew 29% year over year, driven by uptake solutions such as Shopify Payments, Shopify Capital, and Shopify Markets.
Shopify also announced its plans to acquire fulfilment technology provider Deliverr for roughly $2.1 billion, the largest acquisition in Shopify’s history. The deal consisted of roughly 80% cash and 20% in Shopify Class A shares. The transaction will be dilutive to operating margins this year while adding growth to the top line, announced Shopify.
Shares of Shopify had dropped 13% on Thursday as short-term investors resisted the prospect of the dilutive effects of the Deliverr acquisition, commented Josh Beck, an equity research analyst at KeyBanc Capital Markets.
“In this environment we’re in, obviously, investors are generally looking for a clearer path to improve profitability,” Beck said. “With Deliverr, it’s very likely they will take a step backwards this year.”
However, in the long run, it may be the “shot in the arm” the company needed to be able to realize its delivery fulfilment ambitions, which will be a net positive in the long run, Becky added.
According to CFRA analyst Angelo Zino, the acquisition didn’t come as much of a surprise, especially since the company had signalled its intention to accelerate its efforts in fulfilment.
“Nonetheless,” he wrote, “We see the current market landscape unwilling to reward high-growth companies like SHOP looking to sacrifice all profits at the expense of growth.” Zino maintained a Hold rating on the stock and cut his price target from $900 to $500.
The company expects year over year revenue growth to be far lower in the first half and highest in the fourth quarter of this year, “as Covid-triggered acceleration of e-commerce in the first half of 2021 from lockdowns and governments stimulus is absent from the first half of 2022,” the company reported.
Amazon (ticker: AMZN) stock dived after the company reported that its online sales had declined this quarter, sending waves across the sector. Investors were nervous coming into Shopify’s earnings, especially given the mixed results posted by other online retailers this earnings season. This prompted concerns over whether e-commerce could be seeing a post-pandemic slowdown.
Three other e-commerce platforms also faced tanking stock numbers, including Etsy (ticker: ETSY), which dropped by 16.6%, and eBay (ticker: EBAY), which fell 10.4%. Both companies released earnings reports on Wednesday, forecasting less revenue than expected for the June quarter.
“Shopify certainly was a pandemic story, meaning when physical retail shutdown, a lot f them-if not most- of those physical retailers came to Shopify to open a store,” said Finkelstein. “But I think we’re now transitioning to a reopening story as retail and commerce sort of rebalance again.”
KeyBanc’s Beck agreed, noting that the outlook for online shopping remains bright despite the short-term challenges. He placed an Overweight rating on the stock, but his model remains under review and pending further evaluation.