Shopify has landed in troubled waters thanks to CEO Tobi Lutke’s “wrong call,” overestimating the platform’s growth after the coronavirus pandemic. The call resulted in the layoff of 10 percent workforce, reoccurring losses and the fall of Shopify stock value.
Shopify attempted to capitalise on the revenue growth first seen during the lockdown, when the consumers made most of the shopping online. However, when the restrictions got lifted, the consumers preferred physical stores over online shopping.
The Wrong Bet
“We bet that the channel mix – the share of dollars that travel through ecommerce rather than physical retail – would permanently leap ahead by 5 or even 10 years. We couldn’t know for sure at the time, but we knew that if there was a chance that this was true, we would have to expand the company to match,” Lutke explained in a blog post on July 26.
“It’s now clear that bet didn’t pay off. What we see now is the mix reverting to roughly where pre-Covid data would have suggested it should be at this point. Still growing steadily, but it wasn’t a meaningful 5-year leap ahead. Our market share in ecommerce is a lot higher than it is in retail, so this matters. Ultimately, placing this bet was my call to make and I got this wrong,” he added.
Consequences
A day after the layoffs, the Canada-based e-commerce platform reported a double-digit revenue growth, though with increased expenses. This resulted in an operating loss for the second quarter.
It’s a worrisome time for the company. Especially if you own Shopify stock. Is it better to keep or sell stocks when Shopify’s sales growth is on a decline?
Shopify’s annual revenue rose by 16 percent in the recent quarter, which concluded on June 30, to $1.6 billion. In 2019, the same saw an increase of 47 percent. This deceleration was intensified by a sharp increase in the company’s operating expenses. Merchant solutions, which come under Shopify’s lower margin business, rose by 18 percent in Q2. Due to this, Shopify made only six percent of profit despite a growth of 16 percent.
Shopify had also acquired logistics company Deliverr, though its business ended in July. It was aimed at providing Shopify merchants low-cost and fast shipping options.
Verdict
Even though the time is difficult for Shopify, it won’t be right to lose all faith at once. With revenue growth on a decline and expenses on a rise, Shopify may struggle for a few more quarters. Shareholders, who would show patience at this point of time, could reap the benefits in a long run.
As per Statista, in the pandemic-hit 2020, e-commerce recorded 14 percent of sales, while physical stores enjoyed the rest of the shopping business. By 2025, the percentage is estimated to rise to 22 percent. This will definitely benefit Shopify and its shareholders.
