Shopify stock tumbles 19% after forecasting slower Q2 sales growth

Shopify's stock (SHOP.TO)(SHOP) plunged 19 per cent on Wednesday, shedding billions in market value after the company forecast slower sales growth and a decline in gross margins.

The e-commerce software company's first-quarter results surpassed analyst expectations on Wednesday, but concerns about slowing growth weighed on investors. While Shopify says it expects consumer spending in North America to remain resilient, sales growth is expected to slow in its upcoming quarter.

Shopify says it expects sales in the second quarter to grow at a high-teens percentage year-over-year, down from the last few quarters which saw an average growth of about 26 per cent. According to Reuters, the forecast would reflect the slowest quarterly revenue growth in two years. Adjusting for the sale of Shopify's logistics business, revenue increased 29 per cent in the first quarter of the year. The company said it marked the fourth consecutive quarter where revenue growth was greater than 25 per cent, excluding logistics.

Shopify also expects gross margins in the second quarter to decrease approximately 50 basis points, while operating expenses will be up low-to-mid single digits.

Shopify's stock fell as much as 21 per cent in early trading on the Toronto Stock Exchange on Wednesday. It closed the trading day down nearly 19 per cent.

"With Shopify trading at a premium nine-times revenue multiple coming into this quarter, we sense that lofty investor expectations were not met," William Blair analyst Arjun Bhatia wrote in a research note on Wednesday. Still, Bhatia says Shopify "is a long-term winner in the space" given its positioning in the market.

"Overall, we continue to like Shopify’s long-term positioning and, after the dust settles, would view the weakness as a buying opportunity," he wrote, maintaining an "outperform" rating on the stock.

Shopify said its forecast will be affected by the sale of its logistics business to U.S.-based Flexport, a move that was first announced last May. Also weighing on the forward guidance is a strong U.S. dollar and softness in European consumer spending, specifically in the United Kingdom, Shopify's chief financial officer Jeff Hoffmeister said on a conference call with analysts.

Hoffmeister also noted that the largest impact on the changing growth rate is that the company is lapping the quarter where it introduced price hikes across its monthly plans. Last year, Shopify hiked the cost of its Basic, Shopify and Advanced plans, noting at the time that its prices had remained largely unchanged for the last 12 years.

Hoffmeister says the price hikes, which went into effect in April last year, will have "a smaller combined benefit" in the second quarter, "resulting in a headwind to our revenue growth, quarter-over-quarter."

"We remain confident in the great products and go-to market initiatives fuelling our continuous growth and our ability to further strengthen our position as a leader in unified commerce," Hoffmeister said.

Shopify president Harley Finkelstein said on the conference call that "right now, you're seeing the strongest version of Shopify in our history."

"We know our team is one of our most valuable assets, and given that it makes up over half of our cost base, we believe we've architected ourselves to be faster and more agile, which has enabled us to consistently deliver 25 per cent revenue growth, excluding logistics, all while keeping our headcount flat for three straight quarter," he said.

Shopify says sales in the first quarter ending March 31 reached US$1.86 billion, up from US$1.51 billion during the same period last year. The company reported a net loss of US$273 million, or 21 U.S. cents per diluted share, compared to a profit of US$68 million, or five U.S. cents per diluted share, last year.

With files from Reuters

Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.

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