E-commerce software and services provider Shopify ($SHOP) suddenly looks a lot different to investors in the wake of a strategy shift. Canada-based Shopify in early June completed the sale of its fulfillment unit, easing investor angst over rising investments for SHOP stock.
With the move, Canada-based Shopify slashed capital spending and improved its financial outlook.
“Post the recent 'shape shift' where it exited the logistics business and reduced over 20% of the workforce, the company is free cash flow positive,” said UBS analyst Kunal Madhukar in a recent report.
Covid Emergency E-Commerce Boost
Further, Shopify stock has jumped 90% in 2023 as of June 14. Shopify stock has gained 42% since the company announced the sale of the fulfillment business to privately held Flexport on May 4. SHOP stock rebounded from a 2022 sell-off spurred by worries over growing investments and management turnover.
Shares are trading near a 14-month high, trying to clear a short consolidation forged after surging on May 4 following the first-quarter earnings report and the Flexport deal.
“While SFN (Shopify Fulfillment Network) turned out to be an expensive experiment, we also must recognize that Shopify made a fast pivot — taking calculated risks can sometimes lead to strategic mistakes,” said Baird analyst Colin Sebastian in a report. “We still believe Shopify can be a trillion-dollar GMV (gross merchandise volume) platform with take rates expanding as the company widens in scope.”
In 2022, Shopify's GMV growth slowed to 12% ($197.2 billion). GMV growth has been trending down since 2020 when it boomed 96% during the coronavirus pandemic. Consumers shifted to online shopping during the emergency. In addition, Shopify in 2022 accounted for roughly 18% of all U.S. e-commerce, says UBS.
According to research firm Gartner, Shopify is the largest e-commerce software provider with about 15% global share, ahead of SAP (SAP) and Salesforce (CRM). Shopify garners nearly two-thirds of revenue from the U.S.
Shopify sets up e-commerce websites for businesses. It partners with companies such as Stripe to handle digital payments. Well-funded and fast-growing Stripe has put off an initial public offering.
Among merchants services is Shop Pay. It's an accelerated checkout option for stores on the Shopify platform. Shopify Capital provides loans to merchants. The new Shop Cash rewards program provides consumers with incentives, aiming to boost GMV through higher orders.
SHOP Stock: PayPal Friction?
Meanwhile, Shopify has encroached on PayPal Holdings (PYPL), said Lisa Ellis, analyst at SVB MoffettNathanson in a report.
“PayPal and Shopify have a long-standing partnership and PayPal enjoys a privileged position on the Shopify platform,” said Ellis in a report. “However, many of Shopify's payments-related initiatives pose a competitive threat to PayPal.”
She noted Shopify Payments, a payment processing service offered through Stripe. Ellis also noted a “buy now, pay later” consumer financing service that Shopify now offers through Affirm Holdings (AFRM).
Meanwhile, to build up a logistics business that stored and shipped products for its merchant customers, Shopify had acquired Deliverr for $2.1 billion in 2022. In 2019 it bought startup 6 River Systems for $450 million.
Flexport will be Shopify's logistics partner under a revenue-sharing arrangement. Shopify now holds a 13% equity interest in Flexport.
Shopify To Join Amazon Buy With Prime?
Amid the sale, there's also speculation over a possible Shopify deal with e-commerce giant Amazon.com (AMZN).
Amazon now offers its massive distribution network to merchants that do not sell goods on its website. Amazon's product fulfillment services are part of a program called Buy With Prime.
At UBS, Madhukar says Shopify could join the Buy With Prime program based on management comments on Shopify's first-quarter earnings call.
“The company said things are moving positively in their discussions with Amazon on BwP, which could suggest they may be closer to getting a deal done,” Madhukar said. “Although it is still unclear whether a deal will make SHOP whole on gross profit dilution, a resolution could result in a better merchant and consumer experience, and lead to higher volumes that may offset any potential dilution.”
Also, Shopify rival BigCommerce (BGIC) uses Amazon's fulfillment services.
Started in 2006, Shopify recently hiked contract prices for merchants.
In the quarter ended March 31, Shopify earned one cent per share on an adjusted basis, down a penny from a year earlier. Revenue for SHOP stock rose 25% to $1.5 billion, the company said.
Analysts expected the Shopify earnings report to show a loss of 4 cents on revenue of $1.435 billion. Gross merchandise volume rose 15% to $49.6 billion, topping estimates of $47.75 billion.
In 2023, Wall Street analysts expect adjusted profit to boom to 33 cents a share from 4 cents last year. Shopify earnings per share is projected to rise 70% to 56 cents in 2024.
Revenue will rise 20% to $6.74 billion this year and 18% in 2024 to $7.93 billion, analysts predict.
Shopify Stock: Enterprise Marketing Push
To spur GMV growth for SHOP stock, Shopify has partnered with Facebook (FB), Pinterest (PINS) and Alphabet's (GOOGL) Google in social media marketing.
Meanwhile, analysts expect Shopify to target larger companies.
In May, Shopify launched a program called Commerce Components. It enables businesses to integrate Shopify's checkout and back-office services with their existing online platforms. Further, toymaker Mattel (MAT) is one early customer.
“Subscription pricing increase that rolled out at the end of April will be a key catalyst supporting topline growth and margins,” said Evercore ISI analyst Mark Mahaney in a report. “And Shopify continues to drive product innovations, especially for enterprise solutions. Commerce Components offers a lightweight solution for large enterprises without replacing the merchants' whole online infrastructure.”
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