Shopify Inc. shares suffered one of their worst days on record Thursday, after financial results failed to provide much clarity about the road ahead in 2023.
Shopify which acts as the bones of many e-commerce websites and operations, disappointed with first-quarter guidance in an earnings report Wednesday afternoon and executives declined to provide any forecast beyond the current period. The stock fell 15.9% Thursday, its third-worst session on record and worst in exactly a year — shares fell 16% on Feb, 16, 2022, after executives admitted that growth would slow down last year.
The global pandemic accelerated Shopify’s business through 2020 and 2021, leading the stock to more than quintuple from its March 2020 lows to its peak in late 2021. Those gains were wiped out in 2022, however, and year-to-date gains of more than 50% were sliced roughly in half Thursday, with the stock now up 29.4% on the year.
While Shopify easily cleared expectations for the holiday quarter in Wednesday’s report, the forecast left a lot to be desired. Specifically, analysts were concerned about the lack of clear guidance on first-quarter operating profit, though the information executives did provide suggested an operating loss even on an adjusted basis despite recently announced price increases.
First-quarter guidance “implies adj op income will be negative even as rev growth slows,” UBS analysts wrote, while questioning whether the price increases will help out in the second quarter and maintaining a “sell” rating and $32 price target. “2Q could benefit from higher subs revs with very high incremental margins, but on our callback, management was clear they don’t have a view on the impact as merchants could switch to annual plans, or transition to Plus, or switch to other platforms.”
There was also a problem with what management said it would not provide. They declined to give a full-year forecast and said they would no longer report a merchant count, an important metric showing how many customers the company has.
“Unfortunately, investors should not expect incremental transparency going forward as Shopify will no longer disclose merchant count, even as international growth becomes increasingly important,” MoffetNathanson analysts wrote.
“Many investors had been expecting more explicit FY23 guide/commentary on [operating income] profitability, which we didn’t get,” Barclays analysts noted.
Still, the report didn’t seem to change Wall Street analysts’ bullishness on Shopify’s long-term prospects. In fact, three analysts upgraded the stock Thursday morning while only one issued a downgrade, and 21 of the 48 analysts tracked by FactSet raised their price targets in reaction to the report while only two issued a smaller target.
“With estimates for 2023 likely coming down, the macro potentially not being as bad as feared a few months ago, and Shopify showing good traction with key growth initiatives, we like the setup for 2023,” William Blair analysts wrote, while maintaining an “outperform” rating. “And the stock likely pulling back materially on Thursday … should create a good buying opportunity. Although we expect shares to remain volatile in the near term driven by macro concerns, we see the potential for shares to rerate materially higher longer term as investors gain more clarity and comfort around Shopify’s growth and profitability trajectory.”
“After those expectations rebase in the coming days/weeks, we think investors may realize there’s a lot to like going forward,” the Barclays analysts wrote, while raising their price target to $40 from $30.
But there are still many challenges ahead, including growing competition from Amazon.com Inc. Management might look for cooperation instead of competition, though, as multiple analysts wrote that executives told them Shopify is looking to partner with Amazon and integrate Buy With Prime into its own services.
“Management commented that it is in talks with Amazon … about Buy With Prime integration, although it did not provide much detail,” William Blair analysts wrote, while Barclays analysts wrote that “Amazon/Buy-With-Prime integration negotiations are still ongoing, which may remain an overhang.”
In the end, analysts seemed content with the long-term trajectory, but concerned about the near-term results.
“In theory, Shopify has the wind in its sails as the democratizing force of internet entrepreneurship in a world increasingly transacting online. In practice, the opportunities are offset by near-term questions on margins, Buy With Prime, merchant growth, capital intensity, and the expense headwinds of Shopify Fulfillment Network,” MoffetNathanson analysts wrote, while raising their price target to $32 from $30 and maintaining a “market perform” rating.
After Thursday morning’s notes, 20 analysts had the equivalent of a “buy” rating on Shopify stock, while 25 called it a “hold” and three rated the stock a “sell” or equivalent, according to FactSet. The average price target was $47.65.
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