One Great Chart To Understand What Is Happening To Shopify & Growth Stocks More Generally
Along with many others, the Canadian internet wunderkind, Shopify, came out with company earnings this past week.
The Shopify numbers were poor: they missed earnings estimates and also issued poor guidance for the future.
That is the sort of double whammy that underlines the dire straits for the company that we discussed two weeks ago in a post titled "The Cautionary Tale Of Shopify."
A summary of their quarterly earnings call might be termed "bad right now and likely bad in the future."
Furthermore, the company also instituted a round of layoffs - 10% or 1000 people - as it tries to grapple with a new business reality. The share price reacted predictably: the e-commerce giant's shares fell by 14% after the layoffs announcement and have struggled since.
As part of that process however, they actually gave a fabulous presentation where Shopify's CEO, Tobias Lütke, discussed the obstacles confronting the company right now.
In particular, he included a chart that, we think, really underlines the essential dilemma that confronts many of the companies that were recently considered "pandemic darlings":
It obviously shows the massive spike in e-commerce that occurred around the pandemic as nearly the entire world - and especially the rich and technologically advanced world - was forced online.
This created an expectation that online spending would jump ahead by half a decade or even more as more consumers became forcibly comfortable with ordering goods on the internet.
Since then, though, that scenario hasn't quite unfolded as planned.
Here is Lütke:
“What we see now is the mix reverting to roughly where pre-Covid data would have suggested it should be at this point. Still growing steadily, but it wasn’t a meaningful 5-year leap ahead.”
By which he meant that a situation that some thought was a "new normal" has proven illusory and slowly but surely true normalcy has re-asserted itself over the last year.
More broadly, reversion to the previous mean is a powerful force and once again, it seems to have occurred.
Credit to the Shopify founder, he took ownership for this mistake as well:
“Ultimately, placing this bet was my call to make and I got this wrong.”
Lütke's reversal helps to resolve a rather voluble debate about whether pandemic changes would send our economy (and more importantly our society!) on a new trend line.
Now it is important to mention that this was a real debate!
There were certainly good arguments on both sides......
We would be the first to say that back in 2020 and into early 2021 we were very open minded about whether some of the trends launched by the brutal reality of Covid-19.
There was sadly no Pebble Newsletter back then (shocking, we know) but we will be honest and say that we were very open to Shopify - and many other companies - expecting that the new world order would remain, well, the order.
Recency bias was likely at work but also a lot of the new trends seemed to make a lot of sense:
Why do we need to go to the mall to buy the new version of the same sneakers?
And, at minimum, why do hundreds of millions of people waste time, money and energy on a commute that is, apparently, largely pointless?
But it would appear that while the above facts may remain true, our society is only interested (or capable) in so much change at any one time. And rather than make a systemic break in how we organize our economy and society, we really just pulled forward a lot of plans and investment.
It was a one-off event rather than a one time break with the previous trend.
That is less sexy and sort of underwhelming but it was likely always the higher probability outcome.
Unfortunately, as their CEO noted this week, Shopify invested and planned on the new stratospheric trend continuing and acted accordingly. They were by no means alone in this and they are not alone in being caught out trying to build and serve a world that may not exist.
This very public and painful reversal really sums up a lot of what is going on right now:
The pandemic shook up a lot of trends and assumptions and created new ones in many cases. And now some or in fact many are reverting to the mean and others are straight up reversing.
And what about Shopify's stock? Well, amusingly, the company's share price jumped sharply after our previous post (we were flattered) but since then has sold off after its earnings once again.
In summary, Shopify's share price remains volatile and continues to underperform the broader market and, after this week, many other large tech companies.
So, be very wary of buying dips and especially of previously "great" pandemic winners that are severely depressed. Once a stock has fallen 80% then falling another 50% is nothing.
This isn't to say that Shopify is a bad company. To the contrary, it is a great one and is busy proving so right now. Hopefully, it will tweak its operations, tighten its ship and focus on building fabulous new tools for its steadily growing list of customers. Their CEO began that process this week and it will hopefully be the making of an even better company in the years ahead.
It just might take years for its stock to reach new all time highs or even a decent performance. For one thing, as we pointed out at length, the company still loses money. And so it just isn't a company you want to be buying right now. There are too many headwinds - structurally, economically, cyclically - to make it as attractive as it once was. Especially when compared to some other large multinationals.
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