Shopify seems to be recovering

OK, I was way too early with my bullish call in the post “Is Shopify a buy now?” And, yup, it was painful for a long time.

But Shopify’s stock recently rallied 32% following the company’s QI-2023 financial report earlier in May.

So, now the call is down only -3%. Sure beats -35%! 

Short sellers gave us a hint of the rally to come when they backed off their positions by $144-million over the month prior to the first-quarter results - as noted in Short sales on the TSX: What bearish investors are betting against before the report came out .

Whither the stock now? I believe the proper long-term perspective is to remain bullish (although there will likely be reversals to wait out ).

One reason: Retail ecommerce makes up about half of total retail sales in China whereas in the U.S. it is less than 20%; thus, there would appear to be a lot of room for ecommerce companies like Shopify to grow in the U.S. and other western countries.

A second: the large reduction in workforce and disentanglement from the Shopify Fulfillment Network (SFN) announced with the first-quarter report will substantially reduce costs and likely result in Shopify showing profitability ahead.  

A third: the retreat on SFN is not the debacle it might at first seem but a better arrangement, in my opinion. Why so?

Shopify is transferring its SFN assets to logistics firm Flexport and taking a 13% equity interest in the company, which is headed by Dave Clark (the guy who played a key role in building Amazon’s fulfillment network).

This looks more like a partnership that can get the fulfillment network built, allowing Shopify to stay on track with its goal to create a logistics network for its merchants.

As Flexport builds out and completes the new network, the value of Shopify’s equity stake in Flexport should increase by a few billion dollars.

We saw this script play out before with Shopify, with the third-party developers who built apps for its platform. Shopify took equity stakes in several of the developers, and those stakes appreciated hugely in value as both Shopify and the developers grew over the years.  

When third-party app developers Affirm Holdings Inc. and Global-E Online Ltd. went public in 2021, Shopify unloaded its stakes for proceeds of $3.3 billion – at least three-quarters of which was capital gains. That left another  half dozen or so developers and partners still in Shopify’s portfolio.