Shopify is heading higher, says National Bank

A management shakeup at Shopify (Shopify Stock Quote, Charts, News, Analysts, Financials TSX:NYSE) likely has investors wondering what’s next for the Canadian e-commerce giant whose share price has cratered over the past ten months. But it’s too early to make any pronouncements on the effect the C-Suite replacements will have, says National Bank Financial Markets analyst Richard Tse, who gave an update on the company on Thursday, saying there are likely to be more management moves to come.

Shopify, which offers a platform for small, medium and large-scale businesses to market and manage their business and sell their products, announced on Thursday that Chief Operating Officer Toby Shannan will be replaced by current Vice President of Product, Kaz Nejatian, and CFO Amy Shapero will be replaced by Jeff Joffmeister who joins the company from Morgan Stanley. Shannan is expected to join the Board of Directors.

“Kaz is the right person to succeed Toby Shannan in the Chief Operating Officer role,” said Tobi Lütke, Founder and CEO, in a press release. “Kaz is an innovative and strategic product leader who knows first hand what it means to make commerce better for everyone, which positions him ideally for this role.”

“Over the past five years, Amy has been an important partner in helping to advance our strategy. Her financial expertise, steady hand, and deep connection to our company’s mission were invaluable as we scaled our finance function during a period of rapid growth for Shopify,” he said.

Shopify has had its share of issues lately, including a controversial granting of a “Founder’s Share” to Lütke that effectively give him and his family and affiliates 40 per cent voting power over Shopify for as long as he is with the company. That plus a ten-for-one stock split were approved at SHOP’s AGM in June, while the company then announced in July its second quarter earnings, saying there’d be a ten per cent cut to its workforce owing in part to management’s overzealous belief that the acceleration in e-commerce adoption that occurred over the first two years of the pandemic would continue at an exceptionally high rate.

That’s not to mention the poor performance of the stock, which, starting from the general market rotation last November away from growth and tech stocks, has lost about 80 per cent of its value. And where much of the market rallied somewhat over the summer, SHOP has stayed relatively flat over the past four months.

But Tse says investors will want to stick with SHOP, as the company still has a lot of growth ahead of it.

“[I]t’s premature to make any firm conclusions [on the management changes] other than to say that Shopify is taking action to position itself to regroup for growth,” Tse wrote in his update. “We continue to believe Shopify remains a leading disruptor with a meaningful runway of growth. With cash & equivalents balance of $7.0 billion ($5.3 billion following the acquisition of Delivrr), we believe Shopify has more than enough capacity to fund its growth initiatives.”

Tse said the C-Suite moves do raise questions about the company’s path forward in terms of strategy and execution but he maintained that at this stage it’s impossible to tell whether and how the moves will impact the company.

“The reality is that both the [new] appointments appear to be of highly competent leaders with strong track records. What we can tell you with a high degree of certainty based on discussions with our industry contacts is that Tobi Lütke (Founder and CEO) is unemotional and clinical when it comes to leadership, which means we can speculate any appointments have been diligently evaluated,” he said.

“On that note, the question is whether all the executive changes are complete – we’d bet there’s likely more to come as we approach Q3 results,” Tse said.

Tse reiterated both his “Outperform” rating and $75 target price on SHOP, which at press time represented a projected one-year return of 142.1 per cent. 

Shopify’s second quarter was delivered on July 27 and featured revenue up 16 per cent year-over-year to $1.3 billion and a net loss of $1.2 billion or $0.95 per basic and diluted share compared to net income of $0.9 billion or $0.69 per share a year earlier. SHOP said the loss included a $1.0 billion net unrealized loss on its equity and other investments while the net income in the Q2 2021 included a $0.8 billion net unrealized gain from equity and investments. For guidance, management said it expected an adjusted operating loss for the second half of the year, with the third quarter loss likely being larger than that of the second quarter. (All figures in US dollars.)