In the first quarter of 2022, Shopify’s revenue growth continued to slow, as the pandemic forces that have driven the rise of e-commerce wane.
The Ottawa-based e-commerce giant also announced its largest acquisition ever, sharing that it had reached an agreement to acquire San Francisco-based Deliverr for $2.1 billion USD in a cash and stock deal to expand its warehousing and logistics capabilities.
“We’re operating in a more measured macro environment relative to 2021 moderated by inflation.”
-Amy Shapero, Shopify
In Q1 2022, Shopify’s revenue grew to $1.2 billion, representing a year-over-year (YoY) increase of about 21 percent, which pales in comparison to the 110 percent rise the company saw in the first quarter of 2021. According to Shopify, Q1 2021 marked the highest revenue growth in the company’s history as a publicly-traded firm, fuelled by COVID-19 lockdown and stimulus tailwinds. However, as these factors have begun to fade, Shopify’s growth has slowed.
“We’re operating in a more measured macro environment relative to 2021 moderated by inflation,” said Shopify CFO Amy Shapero, during the company’s earnings call. “The prospects for entrepreneurship and digital commerce are greater now than at any point in our history after two transformational years for the industry, and for Shopify.”
Shapero noted that Shopify expects YoY growth will be lower in the first half of 2022 and highest in the fourth quarter “given the absence of stimulus payments and expected higher inflation relative to the first half of 2021.”
In Q1 2022, Shopify posted a net loss of $1.5 billion, compared to the $1.3 billion net income the company turned in during the same period last year. This figure came as the result of losses on Shopify’s equity and other investments. To date, Shopify has made a range of different strategic investments in other tech firms, some of which have seen their valuations drop amid the tech stock selloff.
In advance of today’s results, amid broader concerns about the e-commerce sector, analysts have been lowering their expectations for Shopify’s Q1 earnings. A number of analysts slashed their price targets for Shopify’s shares.
Shopify’s first-quarter financials fell below analyst estimates for revenue and profit. According to Bloomberg, analysts anticipated earnings of $0.64 per share on revenue of $1.25 billion. Instead, the company earned $0.20 per share on an adjusted basis, and missed this revenue target by $50 million.
In response to this report, Shopify, which trades on the TSX and NYSE as ‘SHOP,’ has seen its stock price drop nearly 18 percent from $457.66 USD at market open to $399 per share at time of publication, and continues to fluctuate significantly. The drop in Shopify’s share price represents a two-year low for the company.
As reported by The Globe and Mail, Shopify became the worst Canadian performer on the S&P/TSX Composite Index last week, and has lost more than $155 billion (a 69 percent drop) in market value since the start of the year.
The pandemic has fuelled an increase in the popularity of e-commerce, and companies like Shopify have benefitted from the COVID-19-driven shift away from brick and mortar buying towards online shopping.
However, Shopify’s Q4 and 2021 earnings indicated that the company’s growth has begun to slow as the COVID-19, government lockdown, and stimulus tailwinds that drove the rise of e-commerce begin to wane as pandemic starts to subside. The e-commerce industry faces a number of challenges going forward, including inflation and ongoing supply chain issues.
In fact, Amazon reported a loss of $3.8 billion in its first quarter, compared with a profit of $8.1 billion USD in the same quarter last year. Amazon predicted the slowing trend to continue into the next quarter.
Shopify has also been impacted by a broader tech stock selloff that has also hurt other high-growth, publicly-traded Canadian tech companies. This environment has been fuelled by a combination of factors, including rising inflation, interest rates, and Russia-Ukraine-related tensions.
The first quarter results also follow Shopify recently making moves to protect co-founder and CEO Tobi Lütke’s position in the e-commerce company with a proposed change to its share structure. This arrangement would give Lütke 40 percent of Shopify’s total voting power.
Shopify currently has Class A shares worth one vote per share and Class B shares worth 10 votes per share. The company’s Class B shareholders have a controlling position equivalent to 51 percent of total voting power in Shopify. Shopify has proposed giving Lütke a non-transferable founder’s share that combined with Class B shares would give him 40 percent voting rights.
Shopify has also proposed a 10-for-one split of its Class A and B shares to make ownership more accessible to all investors. The company plans to vote on both of these measures next month during its upcoming annual shareholder meeting in June.
Additionally, Shopify is currently in the process of overhauling compensation packages for its employees, giving its staff more choice between cash and equity, according to The Globe.
Bloomberg was first to report that Shopify is in talks to acquire San Francisco-based e-commerce logistics startup Deliverr to expand its own warehousing and delivery capabilities. If this deal is successful, it will allow Shopify to tap into Deliverr’s nationwide, US fulfillment network.
According to The Globe, Shopify’s Deliverr acquisition, worth about $2.5 billion USD, was expected to be finalized before today’s earnings call. In April, The Globe reported that while a final decision on the transaction has not yet been made, the prospective deal represents part of “an ambitious strategic shift at Shopify to rival Amazon.”
Shopify confirmed these plans today, outlining a deal that will see it pay 80 percent of the $2.1 billion acquisition price for Deliverr in cash, and 20 percent in Shopify Class A subordinate voting shares. Shopify and Deliverr expect the deal to close following regulatory review.
Shopify first began moving into logistics with Amazon-style fulfillment centres in 2019. But the company appeared to be scaling back these efforts in January, when it terminated several contracts with third-party warehouse and fulfillment partners.
However, during the company’s February earnings call, Shapero said these changes constituted a way for Shopify to leverage more of its own warehouses, rather than independent ones. Shopify has outlined plans to invest $1 billion over the next five years towards its fulfillment network efforts.
Last month, Shopify invested in American artificial intelligence (AI) company Crossing Minds. The move represents the company’s latest in a long line of strategic investments in and acquisitions of tech startups, many of which serve Shopify’s merchant ecosystem.
Shopify has previously invested in a wide range of companies, including Vancouver bookkeeping firm Bench, Israel-based e-commerce marketing company Yotpo, US customer relationship software startup Loop. Shopify also holds sizeable stakes in American payment processing firm Stripe and buy now, pay later company Affirm. The company has also acquired companies like Handshake and Dovetale.
During the second half of this year, Shopify expects its commercial initiatives and sales and marketing investments to “gain momentum” over the course of 2022.
The company plans to continue to reinvest all of its gross profit dollars in 2022 back into its business as it looks to expand its services to more merchants in more geographies, develop new products, and strengthen its partner ecosystem. These previously announced plans have since been impacted by Shopify’s decision to acquire Deliverr.
“We have a long history of disciplined management of the resources at our disposal and are confident that taking decisive action this year to help merchants grow through these transitions sets us up for success for the foreseeable future,” stated Shopify in its earnings report.
With files from Meagan Simpson.