Shopify’s president said they are “building a 100-year company,” but investors don’t seem willing to wait that long.
What happened: Shopify shares plunged by 18.5% on Wednesday, which surprisingly wasn’t because it lost US$273 million last quarter. No, investors are worried about Shopify’s prediction that revenue growth will slow and profit margins will shrink in the months ahead.
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The loss was largely due to investments in companies like e-commerce platform Global-E, buy-now-pay-later service Affirm, and marketing automation company Klaviyo.
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The company also expects soft consumer spending in Europe, its fastest-growing market, which will impact the commissions it takes from sales on its platform.
- Margins are getting slimmer mostly because of more marketing spending, something Shopify says will take 18 months to pay off.
Catch-up: Shopify couldn’t keep up the heights of the pandemic-era e-commerce boom, but the company has battled back by attracting new kinds of clients with Shopify Plus — geared towards bigger retailers — and processing payments at point-of-sale — bringing in more brick-and-mortar retailers. Shopify Plus is bringing in $48 million monthly, while point-of-sale revenue is up 50%.
- Those products are sold on monthly subscriptions. The model is more reliable than charging commissions, which fluctuate when consumers aren’t in the mood to spend.
Zoom out: Since it’s so well-known for working with small online retailers, Shopify needs to spend a lot on marketing to let other businesses know it has products for them too. Shopify also has to replace lost revenue, whether that’s from the logistics business it sold, sluggish consumer spending, or small businesses that have gone out of business.
Why it matters: Regardless of how good Shopify feels about the long-term prospects of its new products, any short-term spending doesn’t fit with the ‘we want profits now’ mindset the market is currently in. New products aside, cost-cutting was also a big reason for the company’s turnaround, and investors don’t want to see spending erase those improvements.