Shares of Shopify Inc. (NYSE: SHOP) were down 5% on Friday after the company delivered a lacklustre earnings report for the first quarter of 2022 a day ago. Both revenue and earnings fell short of expectations and there are concerns over the company’s future growth prospects. The stock has dropped 70% year-to-date. There is a mixed sentiment surrounding the stock and here are a few factors to consider if you have an eye on it:
Revenue and profitability
Shopify’s total revenue in Q1 2022 grew 22% year-over-year to $1.2 billion but missed estimates. The company witnessed the highest revenue growth rate in its history as a public company in Q1 2021 which was 110%, driven by the pandemic-fueled spike in ecommerce. However, since then the revenue growth rate has slowed down and the current quarter’s rate of 22% is the lowest in five quarters.
The pandemic-related boom is waning and this is impacting the growth rates of ecommerce companies. Shopify also faces tough competition from larger rivals in the space like Amazon (NASDAQ: AMZN).
The company expects YoY revenue growth to be lower in the first half of the year and to reach its highest level only in the fourth quarter of 2022 due to the absence of the pandemic-triggered momentum.
Revenues in the Subscription Solutions and Merchant Solutions segments grew 8% and 29% respectively on a YoY basis. However, segment revenues too have slowed down and the current quarter’s rates were the lowest in the past five quarters.
Shopify expects that revenue growth for Subscription Solutions in 2022 will be driven by merchants across the world joining the platform at levels comparable to 2021 as the company invests in new commercial initiatives and market expansion efforts. Merchant Solutions revenue is expected to grow at a rate twice that of Subscription Solutions as the company expands into new regions and introduces new features.
In Q1, Shopify’s adjusted net income dropped to $25.1 million, or $0.20 per share, from $254.1 million, or $2.01 per share, in the year-ago period. Adjusted EPS came below analysts’ projections. During the quarter, operating expenses increased more than 60% to $735.6 million from the prior-year period.
Gross merchandise volume
In Q1, Shopify saw gross merchandise volume (GMV) increase 16% YoY to $43.2 billion. Like revenues, GMV also saw a slowdown from the 114% growth seen in Q1 2021. On its quarterly conference call, the company said the easing of restrictions and the subsequent rise in mobility led to a shift in consumer spend to offline retail and travel. Another factor that caused GMV to drop was inflation as consumers turned to discount retailers in the wake of high prices.
Deliverr
Shopify announced an agreement to buy fulfillment technology provider Deliverr Inc. in order to simplify logistics and supply chain management. The addition of Deliverr will more than double the size of Shopify’s fulfillment team.
The slowdown in revenues and GMV as well as the increase in expenses have not gone down well with investors and analysts who are worried about the future growth trajectory of Shopify. While some experts see opportunity for Shopify going ahead, others believe it is better to wait and watch if one cannot handle the risk and uncertainty that currently surrounds this stock.
Click here to read the full transcript of Shopify’s Q1 2022 earnings conference call