Shopify Inc. (NYSE: SHOP) stock was one of the biggest winners of 2019, as investors touted the company as the next Amazon.com Inc. (NASDAQ: AMZN). The share price more or less tripled in that time, with a growth rate that some companies can only dream of. However, the coronavirus outbreak has pulled shares back down to earth somewhat.
The Dow Jones industrial average, S&P 500 and Nasdaq are coming off one of the strongest weeks investors have seen in the past century. However, this was a bear market rally, plain and simple. There are still more questions that need to be answered before the economy can return to full strength. Many of these questions will be especially important for small businesses.
Shopify actually gives an interesting perspective on small businesses in regards to their participation in e-commerce. As the economy and businesses in general are forced into this model by the COVID-19 pandemic, it will be increasingly important to keep a pulse for a potential return to normalcy.
Guidance, What Guidance?
Again, Shopify has been sold as “the next Amazon” more than a few times, and if the forced stay-at-home economy is good for Amazon then it should be good for Shopify as well. Yet, this is not always the case, at least according to some analysts.
Shopify suspended its full-year guidance at the beginning of April. What the e-commerce company did not indicate in its disclosure about guidance was the degree to which the vast number of small and mid-sized businesses will be able to keep operating through or after the recession. This includes Shopify merchants who operate brick-and-mortar locations.
As for what Shopify detailed when suspending its full-year 2020 guidance:
Shopify ended 2019 with momentum that continued into January and February of 2020. This will enable us to report revenue and adjusted operating income for the first quarter within or ahead of the range of expectations provided on February 12, 2020, despite the global economic disruption that emerged in March triggered by COVID-19.
Given the uncertainty surrounding the duration and magnitude of COVID-19, Shopify is suspending the financial expectations provided for full year 2020. Shopify plans to announce financial results for its first quarter ended March 31, 2020 before markets open on Wednesday, May 6, 2020.
For now, analysts are calling for a net loss of $0.19 per share and $444 million in revenue in the first quarter, compared with $0.06 in earnings per share (EPS) and $310 million in revenue for the same period of last year. Looking ahead to the full year, the consensus estimates are $0.06 in EPS and $2.05 billion in revenue.
Coronavirus Trends
The most obvious trend coming out of the COVID-19 crisis is a shift to doing business online. Although there has been a clear move in this direction for years, the pandemic has accelerated this trend. Amazon has been reaping the rewards of this trend. It outpaced any other company by including two-day shipping for its Prime members, though this is not the case currently.
Shopify is a similar story in terms of being a gatekeeper for e-commerce. Its platform is a way for many small and midsize businesses to sell their products online. However, as the global economy has slowed to a crawl, a few things have happened to these businesses: supply chains have been squeezed, foot traffic is nonexistent and cash flow is mostly from e-commerce.
So, while Shopify operates the e-commerce platform for its merchants worldwide, it has little to do with the actual shipping, besides printing labels and assisting with finding a delivery company. Amazon has this aspect of its business built in, a key differentiation. With supply chains strained enough already, shipping is harder to come by and not as reliable as, say, Amazon.
These small-to-midsized businesses using Shopify to sell their products also are being hit with little-to-no foot traffic. Shrinking cash flows, questions about employees and debt are issues that they have to deal with as well. It makes sense to pivot to online sales for these firms, but competition from Amazon may be too much to deal with, as its supply chain is relatively strong.
So, these businesses are stuck between a rock and a hard place. Where does Shopify fit in?
For its basic service, Shopify charges anywhere from 2% to 3% of each transaction a merchant performs on its platform. Although online sales may be booming at Amazon and Walmart (with their strong supply chains), these smaller businesses are getting beaten up, and to come full circle, Shopify is too.
On the other hand, as the economy is beginning to adjust or even pick back up, government stimulus for small business is on the way too. A return to normalcy may be quicker than first thought, but Shopify is not out of the woods yet.
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