Shopify faces its biggest challenge as it moves into phase two

“I don’t like change” — probably some value investor.

Last week, Shopify (NASDAQ:SHOP) forecasted slower growth post-pandemic — sending its stock down 26% since its earnings report. Shopify is entering its next business phase and investors afraid of change won’t like what’s coming…

Slower but still rapid

Shopify is known for selling software to power e-commerce stores — becoming one of the biggest Canadian success stories. But the pandemic may have sent e-commerce stocks up too fast, too soon — and investors are waking back up to a world where shoppers shop in person.

• Shopify didn’t give a sales forecast for this year on its earnings report — but expects growth to be “rapid”, though under 2021’s 57% growth.
• According to the chief investment strategist of IG Wealth Management (via FP), Shopify is an excellent company — the market just got the price wrong.

The e-commerce sector lost nearly half its value from a year ago and aside from slowing e-commerce expectations, Shopify is going through a massive change — which could cost billions.

Finding product-market fit

In 2019, Shopify announced plans to spend $1B over 5 years building its Shopify Fulfillment Network (SPN) — a network of warehouses to help merchants store and ship goods.

• This would let it better compete with Amazon’s massive network of fulfillment centers across North America.
• Plans include partnering with third-party warehouse partners to handle orders.

Last month, Insider reported that Shopify terminated contracts with several warehouse partners — leading to several downgrades on $SHOP. Shopify execs repeated being in the “product-market fit phase” — a techy way of saying “we’re still figuring it out” — very reassuring…

Looking ahead: This isn’t Shopify giving up. It could end up choosing to operate warehouses itself instead of outsourcing — although that would be even riskier for investors.

Investors: Change is scary…

It could take years — and billions in capital investments — for Shopify to get this right, while the uncertainty around SPN is making analysts nervous. Fred Liu, portfolio manager of Hayden Capital, calls these companies in their act two phase — launching a new product, additional market or innovation:

• Investing in companies in this transition has been key to Hayden Capital’s outperformance.
• This transition is a challenging period for the company and investors — bringing higher volatility.

If Shopify pulls this off, it could create even more growth opportunities for a fast-growing business. Though if it fails… investors would be paying up.