Shopify (TSX:SHOP) is an Ottawa-based company that provides a commerce platform and services in Canada, the United States, Europe, and around the world. Indeed, the company’s leadership has sought to dramatically expand its global reach over the past several years. Today, I want to explore what is behind the recent spike in this top tech stock. Moreover, I want to discuss whether readers should consider buying into this surge. Let’s jump in.
Why Shopify stock erupted after its recent earnings
Investors, or the nebulous concept known as “the market,” reacts to news in different ways. Shopify, which has seen its stock struggle mightily since rising to an all-time high in late 2021, released its first-quarter (Q1) fiscal 2023 earnings on May 4. This tech stock has been starving for a positive uptick this decade. Indeed, Shopify was one of the great tech success stories in the second half of the 2010s.
Shares of Shopify have shot up 35% week over week as of close on Monday, May 8. The tech stock has now shot up 76% so far in 2023. Investors can see how Shopify stock has enjoyed a steady climb over the past year with the interactive price chart below.
In its Q1 earnings report, Shopify announced that it would lay off 20% of its workforce. This dramatic cost-savings measure was viewed positively by market onlookers, which drove the upward move for the tech stock last week. However, layoffs were not the only factor that ignited investor optimism.
Should investors be pleased with its latest strategy?
In Q1 2023, the company saw revenues increase 25% year over year to $1.5 billion. Meanwhile, Shopify posted gross merchandise volume (GMV) growth of 15% to $49.6 billion. The company reported that its gross profit climbed 12% to $717 million on the back of higher mix of revenue from its lower-margin Merchant Solutions segment and from the lower margin revenue contributions from Deliverr and Shopify Payments.
On the business front, Shopify launched Commerce Components by Shopify (CCS). This composable stack for enterprise retail utilizes access to the company’s promising components Meanwhile, Shopify launched a new artificial intelligence (AI) shopping assistant on its Shop app. It seeks to create a more personalized shopping experience for retail customers.
Looking ahead, Shopify expects revenue to deliver similar growth in the second quarter. Moreover, the company also forecasts that its gross margin percentage will be identical to its Q1 FY2023 reading. Management predicts that Shopify will achieve free cash flow profitability in each quarter in 2023.
Shopify: Why I’m still skeptical right now…
Shopify continues to boast nice growth potential, though that has been soured somewhat by a questionable balance sheet. Management has vowed that this problem will be minimized in 2023, but investors might want to adopt a “wait-and-see” approach. The recent uptick for the tech stock has invigorated bulls, but it has also drummed up renewed short interest. Merchant Solutions costs remain uncomfortably high and its gross profit jump of 12% is not nearly as juicy as some of its previous quarters have proven.
I’m keeping an eye on Shopify in the months ahead, but I’m not ready to ride the wave just yet, as it is trading just shy of its 52-week high.
