Why SHOP Got Decimated after Q4 Earnings

TLDR:

Thank God for Better Names
SHOP’s 2022 Earnings - Why the stock has gotten decimated
Tool: Hottest Attribution Tool

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Big thanks to the 783 interested in what’s going on in the SHOP ecosystem. Have a friend who’s interested in this. Here’s an easy share link. Let’s dive into what you came for. How the mothership (SHOP) performed in 2022 and what happened to the stock price this week.

Shopify’s ‘22 Earnings

SHOP’s earnings dropped this week and while they reported overall strong numbers, the stock price has been absolutely punished -18% since the earnings call on Wednesday.

SHOP’s Revenue climbed to $5.6bn (+21% YoY), they processed $197.2bn in GMV (+12%), announced price increases to all non-Plus plans, and had a string of big names (Mattel, Supreme, Glossier) migrate to the platform.

So what is going on? And why did investors punish the stock.

Let’s dive a little deeper in their numbers to figure out what’s going on.

The biggest problem SHOP as a stock is facing is slowing growth without a flight to profitability. Gross Margin % (GM%) across the board is down -9% YoY. This comes from 2 factors.

1. More Rev is coming from less profitable offerings.

   1. Merchant Solutions accounts for 73% of Rev and 58% of Gross Margin dollars, but only has a GM% - 39% vs. Subscription GM% - 78%.

2. Operating costs (OPEX) are growing faster (+62% YoY) than Revenue (+21% YoY).

Both are important so let’s dive in more.

1) Shopify positions itself as a SaaS business, but it’s really a Fintech company. 70%+ of it’s Rev come from Merchant Solutions which breaks down into:

• Payment processing: the 1-2% they charge for every transaction.

• Loans and Capital: The Rev-based loans they give out 10-20%.

• Fulfillment services: Basically Shopify Fulfillment Network (SFN).

All 3 are perfectly logical product lines and extensions to their core offering, but have grown so big that it’s hard to say that SHOP is a recurring rev software biz anymore. The Street is starting to realize this and why you’re seeing their stock price fall to lower P/E ratios.

2) OPEX outpaced Revenue making the company very unprofitable.

Shop has 4 main buckets in it’s OPEX with a couple concerning trends:

1. Sales and Marketing (S&M): +36% YoY

2. Research and Development (R&D): +76%

3. General And Administrative (G&A): +89%

4. Transaction and Loan Losses: +65%

1) G&A is growing the fastest (+89% YOY) which you typically DON’T want to see. G&A (20% of total OPEX) is essentially Non-Product/Dev headcount + related expenses. In a software business it’s harder to justify a clear ROI here so investors aren’t going to be as favorable seeing big increases.

R&D (42% of total OPEX) rose considerably (+76% YOY). Since it’s considered ‘investing in future growth’, and companies can write R&D expenses off on their taxes expenses, investors are usually more favorable to these expenses.

2) S&M only grew 36%. It’s not necessarily a bad thing that S&M marketing expenses didn’t grow considerably YoY, but you don’t want to see other expenses like G&A grow at 2x the rate. (It’s 34% of total OPEX).

Considering S&M breaks down to Marketing Spend and Sales Commissions you want to see growth because it reflects overall business growth. The less they make the less the business grows. Contribution margin also dropped -21% YoY which means they less effective acquiring new customers.

3) While Transaction and Loan losses look scary +65% YOY it’s such a small % of spend (4% of total OPEX) that it isn’t a real problem today. That being said it’s something I’m watching. If you want a deep dive here check out the previous newsletter: 2 Things that existentially concern me about SHOP.

All of this led to SHOP being WAYYYYY less profitable this year. In ‘22 SHOP made +$2.9bn in Net Income. In ‘23 it lost -$3.5bn. That’s a brutal -220% YoY swing, which lead to Earnings per Share (EPS) dropping from $2.34 in ‘22 to -$2.73 in ‘23 (-373% YoY). That loss also reduced their cash position to $1.6bn (-34% YoY).

So it is the end of the world for SHOP?

I don’t think so…

Tool that needs to be on your radar: Northbeam for Attribution

If you’re spending more than $50k+/mo on ads you need a tool that keeps the ad platforms honest. Every marketing channel is going to take too much credit for the sales it drives. There’s no way all your Marketing channels drove 150% of sales that you’re seeing in Shopify.

The team at Northbeam is working with leading brands like Jones Road Beauty, Hexclad, Ridge, and Lively to make better sense of their ad data. If you’re having trouble finding the forest through the trees with your marketing performance check them out.

Final Thoughts:

I wouldn’t be surprised if SHOP’s stock continues go down more from here. But keep in mind, even with this week’s shellacking the stock price is still +22% since the start of this year.

I’ve been bullish on SHOP for the past 7 years and everything I’m seeing leads me to be bullish for the next 7.

🧠 The Takeaway:

Tough times ahead for the stock and management unless they can get profitable quick.

1. SHOPs isn’t growing fast enough to be a growth stock, but is still spending like one.

2. SHOP took massive losses in ‘22 crushing their EPS. Investors are punishing them for it.

3. SHOP isn’t really a SaaS business anymore. It’s really a Fintech company that hooks customers with SaaS offerings.

👷 What can you do about this?

1. Try not to get stuck in the price highs and lows around earnings.

2. Think about where your biz fits into their ecosystem. Are you apart of its history or future growth?

3. Investors are punishing unprofitability. Make sure you’re on the right path for your business.

As always. Stay confident, connect with your customers, and keep crushing it.

Jeremy Horowitz

P.S. If you’d like to learn more check out some of our other resources:

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2. To find out more about what we are working on 🏃 Shop News and Reviews