Shopify’s (CA:SHOP, US:SHOP) May 4 announcements could go down in history as one of the most monumental days in the company’s existence. There’s a lot to unpack from yesterday’s news. It’s hard to know where to start.

One thing’s for sure. Analysts seemed to like the moves made by the e-commerce company. Shares jumped more than 23% on the news prompting several upgrades from Bay Street.

There is no question Shopify is returning to its roots. Shareholders ought to be thrilled with the decisions made. Time will tell if they were the tonic needed to restore investors’ faith in the company and stock.

Headcount Cut by 20%

In a blog post on the company website, Shopify announced to employees that it would be cutting 20% of its staff.

“We are changing the shape of Shopify significantly today to pay unshared attention to our mission. There are a number of consequences to this, and I don’t want to bury the lede: after today Shopify will be smaller by about 20% and Flexport will buy Shopify Logistics; this means some of you will leave Shopify today. I recognize the crushing impact this decision has on some of you, and did not make this decision lightly,” stated Shopify CEO Tobi Lütke.

Cutting staff is never easy, especially when the cuts are as significant as those set out in Shopify’s announcement. Approximately 11,600 employees worked at Shopify at the end of 2022, so the reductions eliminated 2,300 positions.

It’s important to note that the severance offered by the company is more than fair. Every employee leaving gets 16 weeks of pay plus an additional week for every year worked at the e-commerce platform. So a five-year veteran, for example, will get 21 weeks or nearly half a year’s pay. In addition, several other things are provided to make the transition easier.

This is the second round of cuts for Shopify. It cut 10% of its staff in July 2022. Its shares were trading at $41 at the time. After the latest announcement, its shares are up 90% in 10 months, but a far cry from where they traded in November 2021.

The reduction in staff will result in significant cost savings moving forward.

“The headcount reductions have positive implications for their path to profitability,” the Financial Post reported ATB Capital Markets analyst Martin Toner’s comments.

Goodbye Fulfillment

In July 2022, the company paid $2.1 billion (all figures in U.S. dollars unless noted otherwise) for Deliverr, a San Francisco-based logistics company. The idea was to bring its fulfillment in-house.

In reversing that strategy, it has agreed to sell its fulfillment assets, including Deliverr, to Flexport, a logistics provider, in return for 13% of Flexport’s shares. It will also sell its 6 River Systems business — it acquired the company in 2019 for $450 million (60% cash, 40% stock) — to grocery tech Ocado Group (UK:OCDO).

“In our view, while fulfillment was a meaningful opportunity for Shopify, it had been an overhang for the stock given the significant financial and operating commitment,” stated National Bank analyst Richard Tse in a note to clients, The Globe and Mail reported.

“Second, Shopify announced a 23-per-cent reduction in its workforce, which we estimate the annualized cost savings from those reductions will be around $270-million,” Tse wrote.

In the end, Shopify management decided that it was easier, and more profitable, to let someone else handle logistics, so it could focus on providing the best software platform possible.

It’s returning to its roots.

Solid Quarter to Boot

Highlights of first-quarter 2023 include a 25% increase in revenue, to $1.5 billion (27% excluding currency), gross merchandise volume of $49.6 billion, 18% higher excluding currency, and free cash flow of $86 million, a nice turnaround from negative free cash flow of $41 million a year earlier.

As a result of the solid quarter, Shopify said that it expects to generate positive free cash flow in all four quarters in 2023, a big step to overall profitability.

Data compiled by Fintel shows that estimated quarterly revenue is forecast to reach 2.94 billion by Dec. 31, 2025. Projected earnings per share is forecast to reach 23 cents by that time.

“Shopify’s Q1 improves the investment thesis in a number of ways: 1) share gains are offsetting macro headwinds; 2) profitability is likely to be sustained going forward; 3) the sale of logistics eliminates business model uncertainty; and 4) increased probability of long-term success for Shopify’s ‘main quest’. Maintain Outperform, as we believe Shopify is one of the most compelling growth stories in our coverage,” The Globe reported RBC Capital Markets analyst Paul Treiber’s comments about Shopify’s quarter.

Treiber raised his price target by $10 to $75, 31% higher than where it’s currently trading. Richard Tse increased his price target by $20 to $80, significantly higher than the average target of $55.22. UBS analyst Kunal Madhukar upgraded SHOP to ‘neutral’ from ‘sell’ while also upping the price target by $30 to $64. Finally, Martin Toner raised his price target to CAD$90 from CAD$82. He rates it ‘outperform’.

The list goes on.

This article originally appeared on Fintel

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