Having excellent management is vital to both a successful company and its stock. These teams set the direction of the company and set policies that can make or break a business. However, when management begins to leave, that should prompt investors to conduct more investigations.
two of Shopify‘s (a store 0.67%) Three senior management positions, chief operating officer and chief financial officer, recently announced plans to move away from their positions. It’s rare to see both positions leave at once, and with Shopify’s recent struggles, investors may think the ship is starting to sink.
Should investors bail out? Or is Shopify still too much stock to own? Let’s find out.
New faces might not be a bad idea
Toby Shannan, the former chief operating officer, has been with the company since 2010. He has lost a lot of experience, but his replacement, Kaz Ngatian, has a lot of experience processing payments. Negatian served as CEO of Kash, a payment technology company, until 2017, then joined Facebook (now meta pads) as a product leader for payments and billing prior to joining Shopify in 2019. While Shannan’s departure is not on bad terms (he is expected to join the board of directors), Nejatian’s promotion clearly indicates the direction of Shopify.
It’s possible that CEO and founder Toby Lutke sees the future of Shopify in its payments processing capabilities along with its merchandising offerings. So this promotion is a reference to this business sector.
Amy Shapiro will step down as chief financial officer after reporting third-quarter earnings. No further details have been released about Shapero’s transition yet, whether she will retire or take another role will be something investors will need to consider as information comes in. She was replaced by Jeff Hofmeister, who comes from the technology investment banking suite at Morgan Stanley. Hoffmeister’s appointment is no surprise – he’s worked as a Shopify consultant for quite some time. Because of its connections with Shopify, it shouldn’t have many issues with speed.
Shopify’s financials have never been so amazing. After announcing earnings in 2021, the company announced a loss in 2022 due to rapidly increasing expenses. As a contributor, I hope Hoffmeister can right the ship and return Shopify to a profitable state while continuing to grow the business.
The first phase of Shopify’s growth has begun, and as the company moves into a new business phase, new leadership may inject ideas for improving the company. While the optics for leaving leadership are not good, appointments and reasons for leaving management should not worry investors too much.
The day after Shopify announced these changes, the stock was up 9% against Nasdaq CompositeA gain of 2% – which indicates market approval of these changes. The stock has since returned to its level before the announcement, so is this a buying opportunity?
Does Shopify Buy Stock?
Since peaking at over $160 per share last November, Shopify has tumbled to around $30 per share. This kind of drop doesn’t happen without good reason, and a slowdown in Shopify’s business, lost profits, and a high stock valuation all contributed to its downfall.
In the second quarter, Shopify’s revenue grew just 16% year over year. This is a massive slowdown compared to last year’s revenue growth of 90% or greater.
Shopify’s net loss was $1.2 billion, which isn’t a good thing considering that it posted a profit of $0.9 billion during the second quarter of last year. The main reason for these losses was expenses increasing faster than revenue and a loss of $1 billion in investment gains (compared to a gain of $0.8 billion in the second quarter of last year). However, Shopify did not sell these investments, so this is only a paper waste and not real. However, when expenses rise faster than revenues, warning flags rise as an investor.
Shopify has probably already experienced the most important catalyst it will ever experience, as the COVID-19 pandemic has forced many retailers to develop or enhance their online operations. As the business matures, investors should expect growth to stop. With growth slowing, the company should focus more on profits, but that’s not what Shopify has done. Instead, it expanded very quickly and recently laid off about 10% of its workforce to cut expenses.
Shopify isn’t executed to a high standard, and its stock valuation reflects that (especially after being priced to perfection for the whole of 2021).
However, eight times sales isn’t cheap for stocks with slow growth and no earnings.
With Shopify’s new leadership, slowing sales, and layoffs, I want to see what third-quarter results look like before making any investment decisions. I keep a close eye on my Shopify site, if the company shows that it can better manage its increasing expenses and return to profitability, it may be worth adding equity. However, work can also quickly turn in a negative direction. I don’t know what will happen next, so I’m happy to keep my post until more clarity is achieved.
Randy Zuckerberg, former director of market development and spokesperson for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Keithin Drury has positions at Shopify. Motley Fool has positions at Meta Platforms, Inc. And Shopify recommends it. Motley Fool recommends the following options: long January 2023 calls at $1,140 on Shopify and short January 2023 calls at $1,160 on Shopify. Motley Fool has a disclosure policy.