Should Shopify Investors Bail Alongside Key Management?

Having excellent management is vital for both a successful company and its stock. These teams set the company’s direction and establish policies that can make or break the business. However, when management starts to leave, that should trigger investors to do some more investigation.

Two of Shopify‘s (SHOP -5.91%) The top three management positions, the chief operating officer and CFO, recently announced plans to transition away from their roles. It’s rare to see both positions depart simultaneously, and with Shopify’s recent struggles, investors may think the ship is beginning to sink.

Should investors bail? Or is Shopify still a great stock to own? Let’s find out.

New faces may not be a bad idea

Toby Shannan, the former chief operating officer, has been with the company since 2010. That’s a lot of lost experience, but his replacement, Kaz Nejatian, has significant experience with payment processing. Nejatian served as CEO of Kash, a payment technology company, until 2017, then joined Facebook (now Meta Platforms) as product lead for payments and billing before joining Shopify in 2019. While Shannan’s departure isn’t on bad terms (he’s expected to join the board of directors), Nejatian’s promotion clearly indicates Shopify’s direction.

CEO and founder Tobi L├╝tke likely sees that Shopify’s future lies with its payment processing abilities in tandem with its commerce offerings. So this promotion is a nod to that business segment.

Amy Shapero will step down from the CFO position after reporting third-quarter earnings. Further details of Shapero’s transition have yet to be reported, whether she’s retiring or taking another position will be something investors should consider as information comes. Replacing her is Jeff Hoffmeister, who comes from the technology investment banking wing of Morgan Stanley. Hoffmeister’s hire isn’t a surprise — he’s served as an advisor to Shopify for some time. Because of his tie-ins with Shopify, he shouldn’t have many issues getting up to speed.

Shopify’s financials haven’t been spectacular. After posting earnings in 2021, the company reported a loss in 2022 due to rapidly growing expenses. As a shareholder, I’m hopeful Hoffmeister can right the ship and return Shopify to a profitable state while still growing the business.

The first stage of Shopify’s growth has played out, and as the company transitions to a new business phase, new leadership may inject ideas to improve the company. While the optics of leadership leaving aren’t good, the hires and reasons for management leaving shouldn’t worry investors too much.

The day after Shopify announced these changes, the stock spiked 9% versus the Nasdaq Composite‘s 2% gain — indicating the market approved of these changes. Since then, the stock has returned to its pre-announcement level, so is this a buying opportunity?

Is Shopify stock a buy?

Since peaking at more than $160 per share last November, Shopify has tumbled to around $30 per share. That kind of drop doesn’t occur without good cause, and Shopify’s slowing business, loss of profits, and high stock valuation all contributed to its downfall.

In the second quarter, Shopify’s revenue only grew 16% year over year. This is a massive slowdown compared to last year’s sustained 90% or greater revenue growth.

Net loss for Shopify was $1.2 billion, which isn’t great considering it posted a $0.9 billion profit during last year’s Q2. The primary culprit for these losses was expenses increasing faster than revenue and a $1 billion loss on its investment gains (compared to a $0.8 billion gain in Q2 last year). However, Shopify hasn’t sold these investments, so this is only a paper loss, not a real one. Still, when expenses rise faster than revenue, my caution flags go up as an investor.

Shopify has already likely experienced the most significant catalyst it will ever see, as the COVID-19 pandemic forced many retailers to develop or fortify their online operations. As the business matures, investors should expect stunted growth. As growth slows, the company should focus more on profits, but that’s not what Shopify did. Instead, it expanded too fast and recently laid off about 10% of its workforce to cut expenses.

Shopify isn’t executing at a high level, and its stock’s valuation reflects that (especially after being priced for perfection for all of 2021).

SHOP PS Ratio Chart

SHOP PS Ratio data by YCharts

Still, eight times sales isn’t cheap for a stock with decelerating growth and that doesn’t have any profits.

With Shopify’s new leadership, slowing sales, and layoffs, I want to see what Q3’s results look like before making any investment decisions. I’ve got a close eye on my Shopify position, if the company shows that it can better manage its growing expenses and inch back towards profitability, it could be worth adding shares. However, the business could also quickly shift in a negative direction. I don’t know what will happen next, so I’m content to hold my position until greater clarity is achieved.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Keithen Drury has positions in Shopify. The Motley Fool has positions in and recommends Meta Platforms, Inc. and Shopify. The Motley Fool recommends the following options: long January 2023 $1,140 calls on Shopify and short January 2023 $1,160 calls on Shopify. The Motley Fool has a disclosure policy.

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