Shopify’s dismal Q1 performance summed up in one visual

Shopify (NYSE: SHOP) released its first quarter results on Thursday, and the numbers were just awful. Not only were the sales numbers uninspiring, but the company also suffered a loss of over $1 billion.

Following the performance, the stock became the latest tech giant to slump more than 15% on its earnings release. What went wrong for the e-commerce business, and is that a reason for investors to be concerned?

Image source: Getty Images.

Sales growth fell sharply in the first quarter

In the first three months of 2022, Shopify’s revenue totaled $1.2 billion and grew at a 22% year-over-year rate. While impressive, this is a much lower growth rate than seen a year ago in the first quarter of 2021, when Shopify’s sales more than doubled, growing 110%.

To Shopify’s credit, it warned investors of a downturn in February when it released its year-end results. While the company didn’t provide a specific forecast, it warned that its revenue growth rate this year won’t be as high as the 57% seen in 2021.

Activity continued to expand in the first quarter at a decent pace, especially as the global economy was ravaged by a series of headwinds, supply chain issuesinflation, lockdowns in China and war in Ukraine.

But it’s important to understand that Shopify’s declining growth rate only tells part of the story. The biggest problems were beyond the top line.

Expenses grew at a much faster rate than income

The slowdown in Shopify’s sales growth was compounded by the company incurring more expenses along the way. Here is a brief breakdown of how the company went from generating a profit a year ago to a significant loss in the last quarter:

Source: Company filings. Table by author.

Operating expenses of $735.6 million were 67% higher than the $439.8 million incurred by the company in the prior year period. This can be a recipe for disaster when costs rise at a higher rate than revenues. While Shopify has invested more in its business amid pandemic-fueled growth, that spending is now proving problematic. In the first quarter, operating expenses represented 61% of sales, whereas a year ago they were only 44%.

The biggest variation in the company’s earnings report came outside of its core businesses. Other income and expenses were negative $1.6 billion this year, compared to a gain of $1.3 billion a year ago. The good news for investors is that this is due to an unrealized loss on stocks and other investments. The loss could turn positive again in the future. For now, this does not affect the company’s cash position, as Shopify’s cash burn for the three-month period was only $53.6 million.

Shopify continues to invest in fulfillment

In the company’s earnings release, Shopify also announced the acquisition of technology company Deliverr. With Deliverr’s management software, Shopify can help merchants with logistics and manage supply chain complexities. Valued at $2.1 billion, Shopify will fund the transaction primarily in cash (80%) and the remainder in stock.

While this may help accelerate Shopify’s future growth, the challenge will be that it could mean more costs in the short term as the company integrates Deliverr and works to eliminate redundancies and inefficiencies along the way. .

Should investors buy the dip?

Following this week’s sell-off, Shopify fell below $400, a new 52-week low for the stock. The last time it hit those lows was at the start of the pandemic, in April 2020.

For long-term investors, buying the growth stock could now present an interesting opportunity. According to Grand View Research estimates, the global e-commerce market remains booming and will grow at a compound annual growth rate of 14.7% through 2027. Shopify’s growing presence in the space could that its current price looks like a robbery in the future. .

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David Jagelsky has no position in the stocks mentioned. The Motley Fool holds posts and recommends Shopify. The Motley Fool recommends the following options: $1140 January 2023 Long Calls on Shopify and $1160 January 2023 Short Calls on Shopify. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Briana R. Cross