Shopify Magnolia Home AR augmented reality

Shopify, the online service platform that helps small businesses set up shop online, has been stumbling on Wall Street lately. 

Shares of Shopify closed down 5.7 percent last Friday to $127.07 — off from its highs of more than $145 earlier in the week — as the tech-heavy Nasdaq Composite, which includes Shopify, fell nearly half a percentage point. Despite a slight recovery during Monday’s trading session, the stock closed 1.64 percent lower on Tuesday with the Nasdaq ending 0.42 percent in the red.

Still, both Baird and Guggenheim Securities rated Shopify as “outperform” or “buy,” respectively, ahead of the company’s earnings Thursday.

Shopify’s lousy month was likely fueled by continued trade war tensions with China. On Wednesday, President Trump said the U.S. will withdraw from the 144-year-old international postal agreement that enables Chinese businesses to mail small packages to the U.S. at a reduced rate.

“The fear is that many Shopify-powered sellers will face higher shipping costs that could put their sites at risk,” said Colin Sebastian, managing director and equity analyst at Baird. But the financial firm doesn’t anticipate an impact on businesses listed on the platform “since only a small minority of merchants using Shopify rely on imports from China.”

In a note to investors, Guggenheim pointed out that the rate of store closings is bad news for the brick-and-mortar crowd, but a good thing for an e-commerce platform hoping to capitalize on online shopping. Shopify makes it easy for small business owners on a budget to set up an e-commerce shop.

“The whole market has seen a pullback,” said Ken Wong, director of Guggenheim. “There’s the perception that all these various components will weigh on Shopify’s business a little bit more than your typical software peer.”

He said, “Like any growth company, there’s going to be some deceleration. I just don’t think the deceleration is going to be as bad as the bears think.”

Shopify recently opened its first store in Los Angeles, giving platform users a space to meet Spotify employees in real life and learn better ways to leverage their companies. In an e-mail, a representative from Shopify said 600 sessions were booked for the Los Angeles store in the first 24 hours.

The store will likely increase awareness for the brand, said Jonathan Kees, managing director of Summit Insights Group. Still, the bulk of the company’s revenue comes from its online stores.

“We are still at a stage where brick-and-mortar sales are 10 [times] e-commerce,” the Guggenheim note read. Even with roughly 700,000 customers, the firm estimates that Shopify has only tapped into about 8 percent of the overall retail market, “leaving significant runway to absorb new business start-ups coming online,” the note continued.

In addition, Shopify Plus, which offers added support to larger companies for a higher monthly fee, will likely generate even more money as more big businesses set up on the platform. Shopify’s “advanced” service is $299 a month, compared with the basic service of $29 a month.

The advanced service was launched in 2014 and is still only used by about 1 percent of Shopify customers, according to Guggenheim. Still, that percentage accounts for 22 percent of the monthly recurring subscription revenue at an annual run rate of $21 million.

The company will release earnings before the market opens on Thursday. Analysts expect the firm to post a year-over-year decline in earnings on higher revenue for the quarter ending September.

Despite the less-than-stellar expectations, shares of the company, launched by Tobi Lütke in 2006, have risen from around $27 to highs of nearly $172 in the last three years. In addition, the platform has grown to include about 600,000 stores spread across 175 countries, with more than $72 billion worth of goods listed on the platform to date, including notable brands like Kylie Cosmetics by Kylie Jenner and styles by fashion designer Rebecca Minkoff.

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