A prominent analyst predicts Shopify could ally with Amazon as both companies navigate shifting consumer habits and an economic slowdown.
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A prominent analyst predicted Thursday that Ottawa-based Shopify could forge an alliance with e-commerce behemoth Amazon as both companies grapple with shifting consumer habits and an economic slowdown that’s eating into consumer spending power.
Rick Watson said that, as Shopify diversifies from its roots as a provider of web development tools for small business and Amazon continues to evolve its tech stack, the two heavyweights might consider entering into some sort of business partnership in a bid to benefit both.
Amazon upped the ante in the battle against Shopify last spring, launching Buy with Prime, a program allowing third-party merchants to access Amazon’s shipping and logistics network to fulfil orders through their own sites.
Watson, the CEO and founder of New York-based RMW Commerce Consulting, noted that Shopify is developing a “plausible” logistics business to compete with Amazon.
Meanwhile, he said Amazon’s biggest market for Buy with Prime is Shopify merchants “because that’s where most of the merchants are in the tier that would be the best fit for that program.”
During Wednesday’s conference call with analysts to announce Shopify’s fourth-quarter and full-year 2022 financial results, Shopify president Harley Finkelstein said he welcomes Amazon’s move.
“When it comes to Buy with Prime, we think any company that’s going to make their infrastructure available to merchants to sell more is a great thing. We like it,” said Finkelstein.
He added that Shopify is still in discussions with Amazon about the program but added “there’s no update at this time.”
It seems a far cry from the Ottawa-based company’s stance four years ago, when CEO Tobi Lütke famously remarked, “Amazon is trying to build an empire, and Shopify is trying to arm the rebels.”
But Watson argued that as Shopify shifts away from its traditional small-business customer base in favour of catering to bigger-value enterprises, an alliance of sorts between the two firms could make good business sense.
“Not only are (Shopify executives) not focused on arming the rebels in the future, they also revealed on the call that they’re talking with the ‘empire’ about their Amazon Buy with Prime service,” he said. “I predict that will lead to a kind of partnership between the two. I think it’s in the interest of both companies.”
Watson’s remarks came as Shopify’s stock price plunged after the Ottawa-based e-commerce giant delivered a fourth-quarter loss of more than US$600 million and issued revenue projections that fell below analysts’ expectations.
Shopify shares were down more than $11, or nearly 16 per cent, to just over $60 in early afternoon trading Thursday on the Toronto Stock Exchange. It’s another big hit for Shopify, which began last year as Canada’s most valuable publicly traded company before shedding three-quarters of its market capitalization.
Shopify recorded a net loss of US$623.6 million in its most recent quarter ending Dec. 31, compared with a net loss of US$371.3 million during the same period the year before. Its revenues rose 26 per cent to US$1.7 billion – above analysts’ average estimate of US$1.64 billion, according to Reuters.
But even though Shopify’s revenues beat expectations, its losses were also higher than analysts projected.
The net loss of 49 cents per diluted share compared with 30 cents per diluted share in the same quarter the year before. Analysts on average had expected the company to lose 16 cents per diluted share, according to estimates compiled by financial markets data firm Refinitiv.
“Investors were hoping that the headcount reductions and the price increases would translate to operating leverage and higher profitability, not a return to losses in the first quarter as is implied by guidance,” Gil Luria, an analyst at D.A. Davidson, said in a Reuters report.
There was another figure in the firm’s earnings outlook released after the closing bell on Wednesday that seemed to spook investors: Shopify’s first-quarter 2023 revenue forecast calls for growth in the “high-teen percentages” – well below the rates of between 50 and 100 per cent the e-commerce juggernaut routinely saw early in the pandemic.
Industry observers said Thursday that Shopify is still feeling its way through a shifting consumer landscape as the rush to online spending from earlier in the pandemic abates and rising inflation and interest rates chip away at disposable income.
“Shopify is going through a rocky time,” said Ian Lee, an associate professor at Carleton University’s Sprott School of Business.
“Even though (fourth-quarter revenues) did do better than was expected, I think it’s the forecast that they’re presenting for 2023 that upset the analysts.”
Shopify recently raised its annual subscription prices by 30 per cent and introduced a wave of new products aimed at attracting more enterprise-level customers that will use its services to run their online stores and e-commerce payment tools.
At the same time, the company has tried to become more cost-efficient, slashing its workforce by 10 per cent last year and implementing measures such as reducing the number of employee meetings.
As a result, Shopify’s fourth-quarter operating loss of US$188.7 million represented about 11 per cent of its revenues, down from 25 per cent in the previous quarter.
Watson said that’s clear evidence that Shopify is closing the gap on its operating margin losses – a road that should eventually lead to profitability as the company lands bigger customers and rolls out more products to generate new income from those enterprise clients.
“With the new CFO (Jeff Hoffmeister) coming in, I think they seem to be committed not to raise their operating expenses to a great degree, and they signalled that they’re not going to be investing a lot in new warehouses, which I think is probably a good move,” Watson said.
“On the other side, they have pretty good product momentum and they seem to have most of their competitors on their heels.”
Watson said he saw no cause for alarm in Shopify’s latest revenue projections, noting the economy could be headed into choppy seas and it’s prudent to err on the side of caution.
“Are you going to go out on a limb and commit to (a revenue growth number in the) low twenties? It probably doesn’t make a lot of sense in this environment, so I think it probably shows some discipline not to overcommit. Who knows what’s going to happen in the next few months in this economy?”
The veteran analyst said Shopify’s decision to embrace big-name brands with new offerings like its Commerce Components stack targeted at higher-value retailers should pay off in higher gross merchandise volumes and more money flowing into products such as Shopify Plus, Shopify Payments and other merchant solutions – an income stream that now outpaces the company’s traditional subscriptions aimed at smaller merchants.
“I think frankly they should stop focusing so much on small merchants,” Watson said. “It’s hard to run a retail business. The ones that have some traction are the ones that Shopify should be investing in.”
Lee agreed that Shopify’s bid to woo enterprise customers makes sense.
“I think they’re going in the right strategic direction,” Lee said. “They’re diversifying their revenue stream, so that’s a good thing. You don’t want to be a one-trick pony.”
But he also said it could take longer than the company initially hoped for the strategic shift to be reflected in Shopify’s bottom line, due in large part to macroeconomic headwinds that are dogging e-commerce businesses across the board.
“They’re still going through a transition,” Lee said. “Wage growth is slowing down dramatically. That means people are not going to have as much money in the future to spend. That’s going to feed back into modest revenue growth for Shopify.”
– With files from the Canadian Press
