The Shopify Inc. growth story sustained a blow on Tuesday after the release of earnings that suggested slower growth and increasing costs to bring and keep merchants on its platform.
The Ottawa digital-commerce company is in the midst of a multiyear effort to expand the services it offers, such as merchant cash-advances and shipping programs, while expanding to new markets and languages. But that expansion effort also helped Shopify’s net loss to widen by 70 per cent in the quarter, as marketing, research and development costs rose. The company also suffered from a slowdown in some key growth metrics that investors watch, such as monthly recurring revenue and the volume of money flowing through its retail shops.
After Shopify released its financial results Tuesday, its share price fluctuated wildly before closing at US$138.21, down 6.7 per cent. Since July 25, Shopify shares are down 20 per cent.
That was the day last week that Facebook Inc.’s disappointing quarterly results collided with months of consumer frustration over privacy concerns and its data-misuse scandal, knocking a historic US$120-billion of market capitalization off of the social-media company. Investor confidence in the entire tech sector has taken a beating since then, with high-valuation stocks getting hit hardest. Despite the beating Shopify took Tuesday, however, some analysts remained bullish because of the company’s push into new markets and product categories.
D.J. Hynes, a tech analyst with Canaccord Genuity, raised his price target for Shopify shares to US$165, telling clients to ignore the markets’ topsy-turvy reaction to its quarter right in the title of his research note Tuesday: “Don’t let the stock tell you something," he wrote, suggesting that it was actually a strong quarter. He noted that the company’s guidance suggested profit generation would be “more Q4-weighted than we had thought,” adding risk to its year-end projections, but remained bullish.
“We continue to believe that Shopify is one of the best-positioned growth stories in application software, and we are confident that this business will ultimately scale to material profits,” Mr. Hynes wrote.
While Shopify’s revenue in its quarter that ended in June grew 62 per cent to US$245-million, it posted a loss of US$24-million owing to increased costs from drawing more merchants to use the company’s growing suite of services.
The company also said it now expected to reach US$1-billion in revenue this fiscal year – which, among full-year guidance that could set Shopify up for what could be a historic milestone, only “modestly” raised expectations, RBC Dominion Securities analyst Ross MacMillan said. After a long period of growth for Shopify, he said in an interview, “it’s all about expectations around deceleration.”
Shopify also saw a continued slowdown in the growth of its gross merchandise volume, or GMV – the total value of orders processed on the platform in the quarter. At US$9.1-billion last quarter, the company’s GMV increased 56 per cent from a year ago, but that growth has been steadily decelerating over the past few quarters, and is down from quarterly highs of 100-per-cent growth as recently as 2016.
Still, GMV beat analyst expectations, and Mr. MacMillan said that the broader merchant-solutions division was rather part of Shopify’s upside this quarter – further bolstered by its shipping and the cash-advance Shopify Capital offerings. Both divisions saw year-over-year revenue double last quarter, the company said.
Instead, Mr. MacMillan said that while the company does not disclose its merchant sign-up numbers, its recurring monthly subscription revenue likely saw a “pretty acute” rate of decline when larger enterprise customers in its Shopify Plus plan were removed from consideration. This, he said, suggests that the total number of new merchants may have fallen year-over-year.
The sustainability of Shopify’s long-term customer retention has also been top of investors’ minds since last year, when vocal short-seller Andrew Left of Citron Research raised numerous questions about the company – including its churn rate, or the rate at which customers leave. While chief executive Tobi Lutke has said that churn is not a metric the company is concerned about, a recent analysis on the website Seeking Alpha suggested that as many as 77 per cent of Shopify’s customers leave the service within a year.
On a conference call with analysts Tuesday, Mr. Lutke said that he regretted not building a functionality within Shopify to let merchants open multiple stores with one account to let them play around, make mistakes and grow. This missing functionality, he said, disproportionately affects Shopify’s churn rate, and was something the company was actively looking at making possible.
“Churn, almost universally, is the successful discovery of something that didn’t work – it’s a building block in this process towards being successful,” Mr. Lutke said.
Tuesday was a rocky day for Shopify, which had to correct its news release soon after the original was published, helping to drive shares down as much as 10 per cent in premarket trading.
Shopify’s own data policies were brought up on the conference call when an analyst asked how the European Union’s new General Data Protection Regulation might affect the company. “Our merchants’ data has always been their own,” Mr. Lutke said. “The GDPR set of regulations have, if anything, fortified the approach we’ve taken all along.”
The company also said Tuesday that it had made filings with Canadian and U.S. regulators to allow it to offer up to US$5-billion in additional shares and securities.
Josh O’Kane