Q4 profit situation is lower than expected, Shopify is facing "inside and outside" double pressure

In December 2012, when news came that Amazon was developing its own independent site project, Tobi Lütke, CEO of independent site giant Shopify, said he was ready for the competition. Shopify's just-released fiscal 2021 fourth-quarter earnings report shows that the process may not be too ideal.

While Shopify continued to maintain significant revenue and GMV growth, subscription revenue and gross margin were both lower than expected, with the stock price plunging more than 11% for two consecutive days. And Tobi Lütke directly made it clear on the earnings call that a series of unfavorable factors are ahead. Combined with the previous news that Shopify has increased its foreign cooperation and joined hands with JD.com, "Amazon rebels" may need to consider the current global e-commerce situation more carefully. Among them, some Chinese players are also under the eyes of Shopify, gradually plumping their wings.

Revenue and GMV continue to grow at a high level, but the dividend has finally come to an end

On February 16, Shopify released its fourth quarter 2021 financial report showing that its total revenue for the record period reached $1.38 billion, exceeding the market expectation of $1.34 billion and an increase of 41% year-on-year. However, the net loss for the quarter was $371 million, compared to a profit of $124 million in the same period last year. The GMV reached $54.1 billion, about 2% higher than market estimates.

However, this unexpected revenue performance does not reassure the market, and the supporting factors behind it are breaking the expectations of the outside world for Shopify. Jefferies analyst Samad Samana said: "Our initial estimate was that the results should be relatively solid given the lack of optimism in the growth situation, however, they were lower than we expected. ”

Specifically, subscription solutions revenue was $351 million, up 26 percent year-over-year, primarily due to more merchants joining the platform, but the revenue fell short of expectations, which was the highest margin. Merchant solutions revenue of $1,028.8 million, up 47% year-over-year, was driven by GMV growth, which exceeded $1 billion for the first time in a single quarter, but the actual cost burden of this service is heavy due to the integration of e-commerce content.

What is even less optimistic is that as e-commerce has eaten the epidemic dividend, and this dividend will gradually fade in 2022, Shopify's "lying win" growth is coming to an end. Its revenue growth rate for the full year of 2021 was 57%, but it was as high as 86% in 2020. The number of merchants at the end of 2021 is about 2 million, an increase of 300,000 over the end of 2020, while the number of merchants at the end of 2020 will increase by up to 700,000.

Shopify "honestly" articulates this dilemma: "The covid-induced acceleration in e-commerce growth will continue into the first half of 2021 and will disappear from 2022, with inflation and consumer spending being cautious throughout the year in the short term." On that basis, Shopify's fourth quarter exceeded expectations and already had the impact of the holiday push, with CFO Amy Shapero calling the holiday sales season "incredible."

It's also a common dilemma for U.S. e-commerce, with Wayfair, Chewy, Overstock and BigCommerce down about 8 percent each, Etsy down 6 percent, and eBay down 4 percent. Amazon has not fallen significantly, but the pressure it faces offline has always been a hot topic, especially its profit performance is basically all from AWS rather than e-commerce.

Shopify's response is open source, and in fiscal year 2021, Shopify launched a series of new initiatives to attract more merchants, such as TikTok Shopping, which enables merchants with TikTok for Business accounts to check out directly from within the app linked to their online store. In six new markets, including Europe and Australia, Shopify launched new retail hardware and money management products for U.S. merchants.

On January 18, JD Group announced that it has reached a strategic cooperation with Shopify, becoming Shopify's first strategic partner in China, currently serving domestic cross-border e-commerce and emerging brands, trying to incorporate more competitive e-commerce factors into the Shopify ecosystem. This is Shopify's usual model of supporting independent sites, including strengthening cooperation with Channels such as Google and Facebook to provide traffic services for merchants.

But the market has become interested in the old story, and the new imagination that Shopify talks about seems to be not only a choice to stimulate market confidence, but also amplify Shopify's potential problems.

The profit situation will not be optimistic, and the Chinese players of the independent station are stirring up trouble

"People are looking at two themes related to Shopify and the pandemic, the first is the sustainability of growth and momentum, and the second is the scale of investment Shopify plans to build a competitive fulfillment business, which can cost a lot of time and money," scott Kessler, global head of technology at Third Bridge, said of Shopify's investment plan.

Jefferies analyst Samad Samana said more directly that Shopify's profitability was "not across the board."

As mentioned earlier, Shopify believes that merchant solution revenue growth will be more than twice as fast as subscription solution revenue growth, the former requiring significant fixed spending, Shopify expects capital expenditures related to fulfillment networks to increase in 2022, and capital expenditures will reach about $1 billion in 2023 and 2024, especially in major U.S. warehouse centers.

The aim of the huge investment is to integrate its fulfillment network into larger, more controlled facilities, providing better quality control and ultimately saving operating costs. In fact, in January this year, due to the slowdown in demand, Shopify said that it had terminated its contracts with several warehouses and fulfillment partners. And to achieve further growth and maintenance of merchants, it is learning from Amazon. In addition, in last year's outlook, Shopify's employee compensation spending budget was $465 million, which nearly doubled to $800 million this year, and it also needs to leave more talent behind.

As a result, Shopify's earnings fell 14% year-over-year despite a 41% increase in sales in the fourth quarter. By 2022, Wall Street expects Shopify's earnings per share to fall 49 percent, while sales will grow 32 percent. It could rebound 57% to $5.14 per share in 2023, but that would still be lower than the 2021 earnings per share of $6.41. Shopify autonomously believes that revenue growth in the first quarter of 2022 will be lower and the highest in the fourth quarter.

Behind the increased investment is concerns about competition – at least that's how the market interprets it. First of all, Amazon, and secondly, the action of Shopify and JD.com shows that the world's most active e-commerce seller group, Chinese sellers, is still a very important link. At this point, some independent station service providers from China are emerging, such as Weimob's Shopexpress. Although they are not as large as Shopify, they have a better "affinity" advantage in understanding the needs and problems of Chinese sellers.

Grand View Research predicts that by 2025, the global decentralized e-commerce market with independent stations as the main body will reach $557.9 billion. The advantage of Shopxepress in the face of the Chinese market is also the ability to connect ecology, it has a more in-depth cross-border e-commerce ecological chain partner, just as Shopify chose JD.com to help improve the selection platform, supply chain network, etc. In addition, domestic independent station players also include shop maker technology and so on.

The concern is also that Shopify's increasing emphasis on Amazon-style underlying service construction will be further and further away from its own e-commerce SaaS attributes, and coupled with the impact of the turbulent bear market in technology stocks, Shopify's stock price has completely lost its gains during the epidemic. As of press time, its $660 stock price has fallen nearly two-thirds from its high of more than $1,700 last November.

The potential good news is that after rapid valuation precipitation, Shopify may be closer to the ideal price for investors, and correspondingly, more than a dozen Wall Street institutions have lowered their Shopify target price.

Finally, it also needs to be made clear that although the fading of the epidemic dividend has indeed prevented the short-term increase in e-commerce penetration, it still has formed a long-term cultivation of consumer habits. This is already a long-term positive for Shopify, because until Amazon's independent business matures, the obvious threat is unknown. For the judgment of Shopify's new stage, perhaps after the initial investment in Q1 2022, there will be more new information.