Rebound in Earnings and Stock Price Fuelled by Shopify's Early Job Cuts

A big part of last year’s market rout was due to the fact that Shopify Inc. was among the first big tech companies to slash its workforce. As a result of those job cuts, some investors believe its stock will outperform peers throughout 2023 as it will result in lower expenses, narrower losses, as well as better cash flow.

‍

Announcing its decision to cut 1,000 jobs in July, the Canadian e-commerce company shocked the market, sending the stock plummeting 14% in just one day, as Tobi Lutke, the company's chief executive officer, said that the company needs to lower expenses after embarking on an aggressive pandemic expansion plan. In the midst of the layoffs, which started at Amazon.com Inc. and eventually spread to software maker Microsoft Corp., the move preceded waves of layoffs across the tech sector.

‍

Taking a look at Shopify's fourth-quarter results on Wednesday, we will be able to see some of the results starting to pay off. According to data compiled by Trade Algo, analysts have raised earnings per share estimates by 37% over the past six months. The free cash flow is still expected to be a negative $109.3 million for the fourth quarter, but that is less than half of the amount from the third quarter.  

‍

Ivana Delevska, Spear Invest's chief investment officer, said that Spear Invest is very excited about the cost actions' impact on this year's performance. A position in Shopify was built up by her firm in the fourth quarter, based on the belief that the stock would rebound. 

‍

There is a possibility that the earnings bump Shopify is going to receive might be a leading indicator for other tech companies that were a bit late to cost cutting, such as Facebook owner Meta Platforms Inc. It was announced on Feb. 2 by CEO Mark Zuckerberg that 2023 would be the year of efficiency, and Meta stocks surged as a result. 

‍

Shopify has announced new partnerships since the job cuts were announced, a flurry of updates for its customers, and a significantly higher pricing plan since the job cuts were announced. The combination of these efforts should be visible in the earnings as a result of these efforts, according to Delevska. "I believe the next set of results will show an increase in the number of people in the workforce," she said.

‍

There seems to be a lot of faith among investors in the turnaround story. This year, Shopify's stock price has increased by 40% while Amazon's stock price has increased by 18%. Aside from being one of the five best-performing stocks in the MSCI World Information Technology Index in 2023, traders are betting that it will continue to bounce after earnings are announced, with options pricing in an implied move of 9.5% after the announcement.

‍

There is no doubt that Shopify's profitability plan will be the main focus area of attention during its earnings call, according to Trade Algo, who wrote in a report that e-commerce is expected to recover after Amazon's third-party business unit posted 20% growth versus consensus expectations of 7%, making an e-commerce rebound expected.

‍

The Shopify bounce, while welcome, comes after a drop that was out of proportion to the market - even for the tech sector. With a market value of C$217.8 billion and a 6% weighting in the S&P/TSX Composite Index, the Ottawa-based company began 2022 as the most valuable in Canada, according to MarketWatch. However, after a near-record slide, the company's market value plummeted. As a result of its poor performance last year, it almost singlehandedly dragged the main index of the country into the red, affecting the value of all pension holdings for every person working in Canada because both the Canada Pension Plan Investment Board and the Caisse de Depot et Placement du Quebec are its shareholders.

‍

With a market capitalization of C$70 billion, the company has a long way to climb before it regains its former glory. It is still unclear whether analysts are convinced, however. The analysts project that Shopify will lose money every year through the year 2025, and they are predicting that the stock will average C$61.54 over the next year, a drop of 5.4% from Monday's closing price. There are only 20 buy ratings on the stock, while 23 hold ratings and five sell ratings are given to it.

‍

In spite of this, shareholders continue to expect long-term growth from the company.

‍

In a recent email, Baillie Gifford's investment manager Gary Robinson told us that the company has an abundance of potential for continued rapid growth, noting that a low single-digit percentage of US retail sales are currently flowing through its platform, and less elsewhere. As Shopify's second-largest shareholder, the company has added to its holdings in the company in 2022 since the shares were not reflecting the "long-term opportunity" for the company.