Shopify Tumbles on Profit Outlook, Continued Marketing Spend

Spencer Soper
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(Bloomberg) -- Shopify Inc. shares tumbled after the Canadian e-commerce company pledged to continue investing in marketing even though doing so will pinch profits.

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The outlook for the current quarter includes increased operating expenses and lower profit margins, the Ottawa-based company said Wednesday in a statement. That overshadowed an otherwise strong first-quarter performance with sales of $1.9 billion that exceeded analysts’ estimates of $1.8 billion.

Gross margins for the second quarter are expected to fall by about 50 basis points, compared with the first three months of 2024.

The US-traded shares fell as much as 21%, for the biggest intraday decline ever, reflecting analysts’ concerns about profit margins going forward. The shares had been flat so far this year before the company reported first-quarter financial results, after more than doubling in 2023.

Shopify President Harley Finkelstein tried to reassure investors on a Wednesday earnings call, saying that the increased marketing expenditures would pay off within the next 18 months. He said the company was focused on finding the right balance of revenue growth and profits.

“This is how you achieve long-term durable growth,” he said.

Shopify is facing an uncertain economic environment and tepid consumer spending. The pace of revenue growth has slowed in the past few quarters to 23% in the first three months of this year. That compares with an average of 26% over the past four periods. Shopify said it expects second-quarter revenue to grow at a high-teens percentage pace.

Shopify has been on a drive to turn around its business as it seeks to reverse a late-pandemic slump. Last year the company cut more than 2,000 jobs in May, the second culling of employees in 10 months.

In a major strategic reversal, Shopify also sold the majority of its logistics unit to Flexport Inc. and agreed to let merchants use Amazon’s “Buy with Prime” service to deliver packages. The sale of the logistics business weighed on Shopify’s first-quarter financial results, resulting in a net loss.

Gross merchandise volume, the overall value of merchant sales across Shopify’s systems, increased 23% in the first quarter to $60.9 billion, above Wall Street projections of $59.5 billion.

(Updates with context throughout)

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