Shopify shares tumble as forecast sparks jitters
ECommerce firm’s momentum slowing after months of trading at lofty levels
Shopify shares tumbled five per cent to $163.50 on the TSX on Tuesday as investors absorbed the Ottawa firm’s latest financial forecasts.
Although the electronic commerce specialist delivered better-than-expected results for the quarter ended March 31, it signalled revenues for the current quarter would be just two to three per cent better than the consensus forecast, prompting an early morning sell-off.
While on the face of it, this seems an odd reaction, Shopify shares have in recent months been trading at rather lofty levels, which often means any financial forecast that’s less than superlative will disappoint.
Here’s how Shopify did so on Tuesday.
The company said it’s forecasting second-quarter revenues to range between US$230 million and US$235 million, compared with analysts’ consensus projection (as measured by Thomson Reuters) of US$228.6 million.
Shopify added that it expected revenue for the year as a whole to be between US$1 billion and US$1.01 billion, compared with the consensus forecast of US$997.6 million.
If achieved, a US$1 billion revenue result would represent year-over-year growth of roughly 50 per cent, normally pretty impressive in a company the size of Shopify.
Nevertheless, the firm’s sales momentum is slowing. Last year, revenues were up 73 per cent. In 2016 they soared 90 per cent.
Like other successful tech firms have done, Shopify faces a very difficult juggling act in trying to satisfy investors. It must simultaneously establish that its sales potential remains strong, that it is managing its growth efficiently and will one day deliver profits.
Relations with independent financial analysts are key. Shopify has made a habit of publishing conservative forecasts, leading analysts to expect even higher numbers each quarter. It’s not clear whether this sort of conservatism will also be the hallmark of Amy Shapiro, who recently replaced Russ Jones as the company’s chief financial officer. If it is, investors should prepare for some pleasant surprises later in the year.
Certainly Shopify performed well enough in the first quarter ended March 31, reporting revenues of US$214 million, up 68 per cent year over year. This compares with consensus estimates of US$202 million.
Shopify also reported an operating loss of US$20.3 million. While this was down from the US$14.5 million loss during the same period a year earlier, it represented nine per cent of revenues, down from 11 per cent during the first quarter of 2017. Analysts had been expecting a first quarter loss this year of US$25 million.
The Ottawa firm said it expected its operating loss to be between US$105 million and US$110 million for the year as a whole, significantly bigger than the consensus projection of US$94.4 million.
Shopify is generating losses because it is investing heavily in new technologies and sales channels worldwide.
For instance, Shopify last year shelled out US$226 million — up 75 per cent compared with 2016 — to develop new sales channels and convince entrepreneurs to try out the company’s eCommerce platform. The company also invested US$136 million — up 83 per cent year over year — to develop new features and products such as card readers and virtual reality storefronts.
Shopify expanded its head count by nearly 50 per cent last year to 3,000. About 1,000 employees are based at headquarters in Ottawa, where the company is planning to expand by roughly 500 employees annually through 2021, assuming revenues continue growing as expected.
Certainly, it has the wherewithal. Shopify finished the first quarter with nearly $1.6 billion in cash, thanks to a series of recent share offerings.
Despite the sharp drop in the value of Shopify shares Tuesday (they were down more than 10 per cent at one point from Monday’s close), there seemed little sense of panic.
The share price, after all, had jumped significantly Monday in anticipation of Tuesday’s financial results. When the latter failed to impress, Shopify shares fell back, but when trading ended for the day they remained two per cent above Friday’s close.