Shares of Shopify Inc. fell on Tuesday as the Canadian tech giant revealed a major round of layoffs as the pandemic e-commerce boom fades. Founder and CEO Tobi Lütke announced in a staff memo that about 10% of the company’s workforce, or roughly 1,000 employees, will be let go by the end of the day. “When the COVID pandemic started, almost all retail businesses moved online due to shelter orders in place. Demand for Shopify skyrocketed. To help merchants, we released our route and sent everything that could be useful,” Lütke wrote in the note, adding that his company also bet that the pivot to e-commerce “would be permanently advanced by five or even 10″ . years.” “Now it is clear that the bet did not pay off. What we’re seeing now is that the mix is back to roughly where pre-COVID-19 data would have suggested it should be at this point.” He said most of the roles being cut are in recruiting, support and sales. Other cuts would target duplicate roles and what Lütke described as “over-specialized” functions. Shopify fell 15 percent to $40.02 on the Toronto Stock Exchange in early trading on Tuesday at morning
“I think this is a sign that the company is seeing some headwinds in its business and is deciding to pursue a more disciplined path to growth and profitability,” Tyler Radke, director of Citi Research, said in an interview.
Just before the layoff announcement, Radke cut his price target on Shopify’s New York-listed shares to $37.00 each from $43.20 amid concerns about what he called “a challenging demand context”.
“This company was growing close to triple digits in some quarters. And, you know, I think as investors we’re often guilty of extrapolating past trends into the future,” he said in the interview.
It’s been a sharp fall from grace for the company’s stock after its growth was turbocharged in the early days of the pandemic. Shopify emerged as one of the star performers on the TSX in 2020, as its share price rose 178 percent over the course of the year. However, as COVID-19 restrictions eased and consumers resumed shopping in stores, the euphoria surrounding Shopify evaporated in a trend exacerbated by investors’ rapid pivot away from growth stocks and when central banks started raising interest rates. By the close of trading on Monday, Shopify’s TSX-listed shares had lost 73% of their value this year.
“The economy can only grow at a certain rate for a long period of time; during short periods when there is a huge stimulus in the system, you can get these hockey sticks of growth that occur as a result of a huge government stimulus. That stimulus has now been withdrawn, valuations have corrected dramatically,” Tom Marsico, CEO and chief investment officer of Marsico Capital Management, said in an interview.
He added that Marsico Capital Management, which had $2.54 billion in assets under management as of June 30, bought shares of Shopify early in the pandemic, and would now give it another look as the stock has fallen so abruptly
“I think Shopify is a very well-run company. The valuation is compelling at this level for more speculative accounts looking for long-term growth. So, would I be interested in establishing a position in Shopify at these levels? Absolutely.”