Macroeconomic factors such as high inflation and rising interest rates may take a toll on Shopify Inc.’s third-quarter earnings, set to be released Thursday, leading at least one tech watcher to expect tepid results.
“My sense is that the numbers will be disappointing to investors and analysts,” Ian Lee, professor at Carleton University’s Sprott School of Business, told OBJ.
“However, I will not be disappointed as Shopify, as with every consumer and business, is adjusting to the post-pandemic world that is emerging, as we return to normality,” said Lee.
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Lee cited macro drivers such as the move by the U.S. Federal Reserve and central banks around the world to raise interest rates to tame inflation. Those rate increases have been weighing on pricier stocks, like technology companies, by making less-risky bonds seem more attractive in a volatile stock market. They’re also causing consumers to ratchet back spending and causing small businesses to think twice about future operations.
The Fed is expected to raise interest rates another three-quarters of a percentage point at its upcoming meeting in November. Similarly, the Bank of Canada is expected to announce another hefty interest rate hike Wednesday, edging the bank closer to the end of one of the fastest monetary policy tightening cycles in its history. It also comes amid fears that a recession is looming.
Another concern is the return of customers to bricks-and-mortar stores as the grip of the pandemic eases, Lee said.
In its second-quarter results released in July, Shopify said that the rate of spending its merchants had seen was higher than in 2018, before COVID-19, but was lower than what the company had planned for, resulting in a US$1.2-billion loss in the quarter along with significant layoffs.
At that time, Shopify president Harley Finkelstein detailed how the company had anticipated that the amount of shopping people carry out online, instead of at brick-and-mortar retailers, would permanently leap ahead by five or 10 years from pre-pandemic predictions.
“Fast forward to now, as things have turned out differently,” he said in July.
Analysts will also be looking for traction on Shopify’s plans to build its own distribution networks. In May, Shopify upped the ante in its fight against Amazon.com Inc. with a US$2.1-billion deal to buy logistics company Deliverr Inc. The transaction is designed to help Shopify deepen its inventory capabilities, broaden its storage and freight services and tap into a network of warehouses and couriers Deliverr has built.
The aim is to use automation and logistics technology to build out a network of both Shopify-owned and third-party warehouses that can deliver packages in two days or less to more than 90 per cent of the U.S., said Finkelstein in May.
Rick Watson, CEO and founder of RMW Commerce Consulting, wonders how much the first full quarter of Deliverr integration will weigh on the company’s profitability and whether Shopify will announce a new vertically integrated logistics strategy to the broader market.
“They have kept their sales and marketing pretty quiet to date, despite their investment/acquisition,” Watson said. “It is my thesis that there are still significant concerns about pursuing a down-market strategy in a logistics market dependent on volume and utilization for profitability.”
Watson also questions how much inflation and consumer spending re-prioritization will affect Shopify’s merchant solutions revenue, which he said represents the fastest-growing two-thirds of the company’s revenue.
“A majority of Shopify revenue is dependent on merchants whose products are not ‘must haves’ for consumers and are instead ‘nice to have.’ This is the exact type of spending that consumers are deferring,” said Watson, adding that Shopify does not benefit in this kind of environment because it is a collection of diverse boutique stores, not one place for consumers to shop.
“Despite its launch of Shop App, Shopify has not pursued a marketplace strategy for fear of becoming ‘like Amazon’ to its merchants,” Watson said.
Finally, Watson questioned how much entrepreneurship could be affected by economic uncertainty.
“It is my thesis that (Shopify’s) subscription revenue will continue to grow, but perhaps at a slightly reduced pace as there is a slightly greater flight to safety,” Watson said. “The only major concern here is if a greater number of existing accounts churn off, it could weigh down new account additions.”
A recent analysis by The Globe and Mail suggests that Shopify has a growing problem with customer retention, estimating that about one-third of customers last a full year on the platform. Shopify has acknowledged that many businesses fail, but said its platform keeps barriers to entry low.
