Shopify is one of the most misunderstood stocks in the market today: Ivana Delevska
Shopify Inc. was among the first technology giants to slash its workforce during last year’s market rout. Now, some investors say its stock is poised to outperform peers over the course of 2023 as those job cuts translate into lower costs, narrower losses and better cash flow.
The Canadian e-commerce firm shocked the market when it cut 1,000 jobs in July – a move that sent the stock plummeting 14 per cent in a day as Chief Executive Officer Tobi Lutke said the company need to lower expenses after an aggressive pandemic expansion plan. The move preceded waves of layoffs across the tech sector, including at Amazon.com Inc. and software maker Microsoft Corp.
The payoff should begin to be evident on Wednesday, when Shopify reports fourth-quarter results. Analysts in aggregate have boosted earnings per share estimates by 37 per cent over the past six months, according to data compiled by Bloomberg. While free cash flow is still expected to be a negative US$109.3 million, that’s less than half the amount from the third quarter.
“We are pretty excited about the cost actions’ impact on this year,” said Ivana Delevska, chief investment officer at Spear Invest. Her firm built up a position in Shopify in the fourth quarter, betting on a rebound.
The earnings bump that Shopify is likely to get may be a leading indicator for other tech companies that were relative latecomers to cost cutting, such as Facebook owner Meta Platforms Inc. Shares of Meta surged on Feb. 2 after CEO Mark Zuckerberg pledged to make 2023 the year of efficiency.
Since the job cuts, Shopify has announced new partnerships, a flurry of updates for customers and a significantly higher pricing plan. Delevska said the combination of those efforts should be visible in the earnings. “I think there is going to be a bump at the next set of results,” she said.
Investors appear to have bought into the turnaround story. Shopify’s stock has jumped 40 per cent this year while Amazon shares are up 18 per cent. Indeed, it’s one of the five best-performing stocks in the MSCI World Information Technology Index in 2023 and traders are betting it has room to bounce further, with options pricing in an implied 9.5 per cent move after earnings.
Shopify’s profitability plan is “likely to be the main focus area of attention” during its earnings call, Bloomberg Intelligence analyst Anurag Rana wrote in a report, adding that an e-commerce rebound is expected after Amazon’s third-party business unit posted 20 per cent growth compared with consensus expectations of 7 per cent.
To be fair, Shopify’s bounce comes after an outsized drop – even in the tech sector. The Ottawa-based company started 2022 as the most valuable in Canada, with a market value of C$217.8 billion and a 6 per cent weighting in the S&P/TSX Composite Index, before a near record slide. Its performance last year was so dismal that it almost singlehandedly dragged the country’s main index into the red and affected the value of the pension holdings of every person working in Canada since the Canada Pension Plan Investment Board and the Caisse de Depot et Placement du Quebec are both shareholders.
The company, now valued at C$70 billion, has a long way to climb to regain its former glory. Analysts remain to be convinced, however. They forecast that Shopify will lose money every year through 2025, and their average price target for the stock over the next year is C$61.54, a drop of 5.4 per cent from Monday’s closing level. It has only 20 buy ratings versus 23 holds and five sells.
Still, shareholders continue to expect growth over the longer term.
“With a low single-digit percentage of U.S. retail sales currently flowing through its platform, and much less elsewhere, there is abundant scope for continued rapid growth,” Baillie Gifford investment manager Gary Robinson said in an email. The firm is Shopify’s second-largest shareholder and added to its holdings in 2022 because the shares didn’t reflect the “long-term opportunity.”