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Shopify’s Stock Drops 18% Due To Poor Expectation

Shopify’s stock fell 18% yesterday, devaluing the firm by about $20 billion, following the release of earnings and revenue projections for the upcoming quarter that alarmed investors.

TakeAway Points:

  • Shopify’s stock fell following the release of the company’s first-quarter earnings. 
  • The Canadian online retailer posted strong financial results, but it provided an unimpressive second-quarter outlook.
  • According to Shopify, sales growth in the second quarter is expected to drop to a “high-teen percentage rate” on an annual basis.

Shopify’s Stock Fell 18%

In the first quarter, the company’s earning per share were 20 cents adjusted as opposed to 17 cents predicted, and its revenue was $1.86 billion against $1.85 billion expected

Shopify’s projection for the current quarter overshadowed the company’s better-than-expected first-quarter performance. Although it is in line with consensus projections for growth of 19.5%, the Canadian e-commerce business said it anticipates second-quarter revenue to expand at a high-teens percentage rate year over year. This is still a drop from recent quarters. For the last six quarters, Shopify has reported revenue growth in the low to mid-20s on an annual basis.

Shopify management stated during a conference call with analysts that consumer spending in the United States is still high. but “we have factored in headwinds related to [foreign exchange] from the strong U.S. dollar and some softness in European consumer spending in our Q2 outlook.”

Gross Margins Prediction for Second Quarter

Since Shopify’s logistics division was sold to freight forwarder Flexport in May of last year, gross margins are predicted to drop by roughly 50 basis points in the second quarter compared to the first. In contrast to Wall Street’s forecast of flat growth, Shopify stated that it anticipates operational expenses to rise by low to mid-single digits on a quarterly basis.

On Wednesday morning, Baird analysts informed clients in a note that the increased operational expense guidance cast doubt on “an otherwise solid Q1 report as the company is probably leaning into marketing and R&D (AI/GenAI) investments.”

Shopify Steps up its AI Features for Business

Shopify, a company that provides tools for businesses to sell goods online, has increased the use of artificial intelligence in its business tools in recent quarters. One such tool is “Shopify Magic,” which can do tasks like automatically creating listings and editing photos. Amazon, Etsy, and eBay are competitors that have also added AI tools for their sellers.

“Without a clear positive impact on [gross merchandise volume] and revenues from recent investments, investors will question the margin trajectory, which will rerate the stock a bit,” the Baird analysts wrote. They have an outperform rating on Shopify’s stock.

The report highlighted that Shopify has made investments in AI but has reduced its spending in other areas, such as logistics services. 20% of the company’s employees were let off in May of last year as it dealt with the post-pandemic decline in e-commerce.

In an interview with CNBC’s “Squawk on the Street,” Harley Finkelstein, Shopify President, stated that the company is “long-term-focused.”

“We want to be able to make those investments for the future, which is why we gave the guide we did,” Finkelstein said.

In comparison to a profit of $68 million, or 5 cents per share, in the same period last year, the firm posted a net loss of $273 million, or 21 cents per share.

According to Shopify, the total amount of goods sold on the site, or gross merchandise volume, climbed by 23% to $60.9 billion. According to StreetAccount, that exceeded estimates of $59.5 billion that were widely held.

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