It’s been a very challenging 18 months for investors holding Shopify (NYSE: SHOP) stock. In November 2021, the share price reached $169 before plunging all the way down to $26 just 11 months later.
Speaking as a shareholder myself, I can confirm this 84% drop was unexpected and brutal.
However, there was better news yesterday after the Canadian e-commerce platform released its Q1 results. The share price ended the day 23% higher.
But did the update really warrant such a big jump? Let’s take a look.
Strategic pivot
There was a lot to digest after Shopify’s report. Turning to the numbers first, quarterly revenue was $1.5bn, a 25% increase over the same period last year. And there was a nice surprise as earnings per share came in at $0.05, which was much higher than the $0.04 loss per share that analysts were expecting.
The firm also announced that it’s reducing its workforce by 20%. Plus, it’s selling its logistics business to unlisted freight company Flexport, in which it will take a 13% equity stake.
Flexport was last valued at $8bn, so a back-of-the-envelope calculation suggests Shopify is accepting a massive write-down through this sale. It has spent way more than $1bn building out its Shopify Logistics business over the last few years. So that loss is worrying.
However, its easy to see why the market cheered this news. Running a large-scale logistics network is notoriously capital-intensive. Divesting itself of this operation should help Shopify deliver growth alongside consistent profits, at least over the long term.
The main quest
In a letter addressing the changes, CEO Tobias Lütke talked about “main quests” and “side quests”. The first refers to why the company exists (its e-commerce platform), while the second relates to ancillary activities, which can become a distraction (such as its logistics business).
Lütke also noted: “We are at the dawn of the AI era and the new capabilities that are unlocked by that are unprecedented. Shopify has the privilege of being amongst the companies with the best chances of using AI to help our customers“
This indicates that the company is going to invest heavily in artificial intelligence (AI) capabilities for its customers moving forward. Getting this right will require intense focus and innovation, so streamlining its operations now makes sense to me.
Should I sell my shares?
One concern is that the company faces intense competition from the likes of Amazon and Adobe. Specifically, Amazon’s Buy With Prime product for third-party sites seems a serious challenge to Shopify Payments, which is worth monitoring.
However, as the operating system of choice for millions of online stores, Shopify is already powering a large part of the digital economy. And it has partnerships with YouTube, Facebook and Instagram Shops, Pinterest, TikTok and JD.com.
So I see it continuing to grow alongside e-commerce in general, with significant opportunities for international expansion.
Plus, I believe the stickiness of its platform makes it unlikely that customers will switch to rivals. The firm has already started raising prices for all its subscription plans, which should increase profitability.
So I won’t be selling my shares as things stand. In fact, I’d be more inclined to add to my holding if an attractive opportunity arose in the near future.
