Shopify Inc. SHOP-T wants to spend US$1.2-billion over the next three years to expand and more tightly control its warehousing and fulfillment network as it grapples with a revenue slowdown that sent its share price plummeting Wednesday.
The Ottawa company’s shares plunged after it released disappointing financial results from the final quarter of 2021, and they closed at $938.91 on the Toronto Stock Exchange, down 17.1 per cent. The company revealed that the COVID-19 rush that sent merchants to the e-commerce platform in droves two years ago is slowing down, and was very apparent by the Black Friday weekend last November. It processed US$6.3-billion in sales over the weekend last year, up 24 per cent from US$5.1-billion in 2020, but sales that year were up 76 per cent from 2019.
Shopify, which reports in U.S. dollars, said its revenue for 2021′s fourth quarter was US$1.38-billion, up 41 per cent from a year earlier and beating the analysts’ consensus forecast of US$1.34-billion. But that total revenue growth decelerated from 94-per-cent fourth-quarter revenue growth between 2019 and 2020, and the company said it expected this slowdown to continue for at least the first half of 2022.
Shopify’s stock price has collapsed by more than half from its late-November peak amid a sharp sell-off for tech companies. “Given the current market for technology stocks, we think the stock needed a blockbuster quarter to have it move meaningfully higher in the short term,” National Bank of Canada analyst Richard Tse said in an e-mail.
Company executives said Wednesday Shopify is changing its warehousing and fulfillment strategy, first announced in 2019 as executives began more clearly describing the company as an alternative to mega-retailers such as Amazon.com Inc. The company has long been quiet about the size and capabilities of its network, originally expected to cost $1-billion. But Shopify revealed it had spent US$117-million so far, and the system largely depended on partnering with third-party warehouses to minimize Shopify’s assets in the space.
That strategy quietly changed in 2021, however, when the company began operating its own warehouse in Atlanta – one that executives said Wednesday will serve as a model for a three-year, US$1.2-billion plan for a network of leased, self-operated facilities across the United States.
Shopify said it hopes to bring two-day shipping to 90 per cent of the U.S., while integrating the network more closely with its sales systems to make it easier for its merchants to get their wares in front of customers. Executives also said they hoped to bring in bigger retailers into the fulfillment program during the process.
“We are shifting the network model to larger-capacity hubs, and we want to operate more of them ourselves to better control quality, but also cost,” Shopify president Harley Finkelstein said on an analyst call. “We’re transitioning from prototype into build,” he added later.
Mr. Tse called the new strategy unsurprising. “They never were specific with targets when they originally unveiled their investment which tells me they needed to better learn and optimize their fulfillment model,” the analyst said. “Given the challenging backdrop for tech stocks, that’s unlikely to get a pass from investors in the short term.”
Though the company took a loss of US$371-million in the most recent quarter, or US$2.95 per share – tripling in size from a year earlier – it was primarily caused by a nearly half-billion-dollar collapse in the value of its stakes in two public companies, Affirm Holdings Inc. and Global-E Online Ltd., which have been battered in the tech sell-off.
Both are fast-growing vendors to Shopify’s merchants through its app store. The two investments are centrepieces of a strategy Shopify adopted in the first year of the pandemic to use its clout to take bigger stakes in the spin-off value it has generated.
In January, Shopify made a significant move into the Chinese market with a new partnership with JD.com, which provides fulfillment from JD’s U.S. warehouses directly to consumers in China.
In the fourth quarter, its Shopify Plus service for large merchants accounted for 29 per cent of its monthly recurring revenue, up from 25 per cent a year earlier.
“The firm is now at the point where those large ambitions start to come with a significant price tag attached,” Canaccord Genuity analyst DJ Hynes said in a research note, referring to the fulfillment network. “We view the incremental investments as putting Shopify on the offensive, tackling a really complex but painful part of the merchant-customer relationship. If they’re successful, this is going to be a significantly larger company in the future.”
Martin Toner, an analyst with ATB Financial, said in a research note he believes these kinds of investments should assist Shopify’s revenue growth as it stabilizes after pandemic highs. “We continue to believe e-commerce sales will continue to grow, and that Shopify will gain share of customers and customers’ wallet[s],” Mr. Toner wrote.
Shopify also plans to allow more merchants to sell non-fungible tokens (NFTs) through its e-commerce platform, a program that is currently in its beta-testing stage for U.S.-based customers, who can use partner apps to mint NFTs on blockchains such as Ethereum and Polygon.
With a report from Sean Silcoff.
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