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Shopify Turns to ‘Harry Potter’ to Show Heft Ahead of Earnings

Bloomberg logoBloomberg 4/27/2021 Danielle Bochove

(Bloomberg) -- Shopify Inc. underpins a global business ecosystem whose economic impact was worth more than $307 billion in 2020, according to a new report commissioned by the e-commerce giant.

Shopify released its annual Economic Impact Report on Tuesday, one day before the release of first-quarter earnings that may show signs that growth is starting to slow for Canada’s largest company. The study, conducted by Deloitte, measures the effect of direct spending by the e-commerce company’s merchants, induced household spending by their employees and indirect spending by businesses in their supply chains.

Giant retailers like Walmart Inc. and Inc. often promote their economic impact in the form of new jobs created or taxes paid. Calculating a company’s broader impact in terms of revenue created is trickier, especially considering that Shopify counts 1.7 million businesses as clients around the world.

The study leans on some creative comparisons to make the numbers meaningful: Cross-border sales are equal in value to the size of the entire global recorded music industry, for example. Or, if every dollar in revenue generated by Shopify merchants in developing nations were a word, it would fill more than 5,300 complete sets of the “Harry Potter” series.

But the report, however debatable its findings are, is consistent with founder and CEO Tobi Lütke’s preference for a broad corporate narrative over the quarterly measures that preoccupy investors.

“It’s our attempt to, in some ways, take the focus away from earnings to tell a different story,” Ian Black, Shopify’s managing director of Canada, said in an interview.

Shopify is focused on “empowering merchants instead of chasing revenue,” the report states, noting that its partners -- for example, app developers, designers and marketers -- generated more than four times Shopify’s own revenue in 2020. “We’ve been conducting an experiment since Shopify was born,” Lütke said in a written statement. “Our hypothesis is that all economies depend on entrepreneurs and small businesses to thrive.”

For investors, though, the key questions are less academic and more forward-looking. The earnings results are expected to be strong, with analysts estimating revenue will rise 83% over the same period last year to $862.2 million. What’s not clear is how much e-commerce growth is likely to slow once the global pandemic ebbs, and how much Shopify can mitigate any deceleration by boosting sales of value-added products like point-of-sale terminals and logistics-management systems.

“With another round of stimulus here in the U.S. at the end of December, and a second set of payments in March, what does GMV growth look like in the first quarter?” said Samad Samana, an analyst at Jefferies LLC, referring to the broadest measure of product sales, gross merchandise value, which is the total value of merchandise sold. “Basically what is the durability of that kind of hyper-growth?”

chart, bar chart: Shopify's gross merchandise value expected to exceed $30 billion in 1Q © Bloomberg Shopify's gross merchandise value expected to exceed $30 billion in 1Q

Shopify’s shares climbed 178% in 2020 as global lockdowns turbocharged purchasing from e-commerce sites. But they’ve slipped by about 20% since the company warned in February that growth would decelerate in 2021 as brick-and-mortar competitors reopen. The company insists that the overall shift to online shopping is permanent and that even the negative financial aspects of the pandemic -- for example, global supply disruptions and broader economic uncertainty -- have had little impact.

Shopify merchants recorded $20 billion in cross-border sales in 2020, according to the report, despite some disruptions to the flow of goods across the Canada-U.S. borde, while simultaneously benefiting from the growing shop-local movement.

“The shift to e-commerce that’s happened this past year, that’s increased both cross-border sales and local shopping,” Black said. “Certainly our merchants are facing some challenges in shipping cross-border but, by and large, they’ve still been able to do it, and we’ve also seen buyers having patience for that through Covid as well.”

Canadian Imperial Bank of Commerce lowered its price target for Shopify this week to $1,325 from $1,750, citing a slide in web traffic for consumer discretionary merchants in April relative to the first quarter. (The shares closed at $1,166 on Monday in New York.)

Since it was founded in 2004, Shopify has expanded from a core software business that helped businesses get online quickly to a company that provides an array of services including payments, lending and shipping.

“Shopify’s popularity is growing, evidenced by its increasing merchant base and satisfaction,” Ken Wong, an analyst with Guggenheim Securities LLC, wrote in a research note on April 20, “However, competition has intensified as well, and customers could choose other, more differentiated technologies and companies if Shopify doesn’t continue innovating, enhancing and improving its platform.”

Analysts will also be looking for insight into the departure of three longtime executives this month, including how and when they will be replaced.

“The decisions were very much good for the individuals as well as for Shopify,” Black said. “We’re really excited too about being able to bring in some top-tier leaders from around the world.” He declined to provide details on timing.

Shopify hasn’t provided guidance for 2021. In Canada, a third wave of Covid-19 could delay the return of consumers to physical shops, mitigating any slowdown in e-commerce, said Anurag Rana, an analyst at Bloomberg Intelligence. “It’s all about the growth rate and whether the growth rate is going to slow down this quarter or next,” Rana said. “What is a normalized growth rate for Shopify starting next year when all of this is going to be behind us?”

Shopify Growth to Continue Before Tough Comps: 1Q Preview

That uncertainty spells potential for big stock moves, according to Davidson analyst Tom Forte.

“We see a greater likelihood for volatility and see the potential for short covering if the company reports strong results and provides solid guidance,” he wrote in April 21 note.

(A previous version of this article corrected analysts’ revenue forecast in sixth paragraph.)

(Updates with additional report details in third paragraph)

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