(Bloomberg) -- Shopify Inc. was the among the first technology giants to slash its workforce during last year’s market rout. Now, some investors say its stock is poised to outperform peers over the course of 2023 as those job cuts translate into lower costs, narrower losses and better cash flow.
The Canadian e-commerce firm shocked the market when it cut 1,000 jobs in July – a move that sent the stock plummeting 14% in a day as Chief Executive Officer Tobi Lutke said the company need to lower expenses after an aggressive pandemic expansion plan. The move preceded waves of layoffs across the tech sector, including at Amazon.com Inc. and software maker Microsoft Corp.
The payoff should begin to be evident on Wednesday, when Shopify reports fourth-quarter results. Analysts in aggregate have boosted earnings per share estimates by 37% over the past six months, according to data compiled by Bloomberg. While free cash flow is still expected to be a negative $109.3 million, that’s less than half the amount from the third quarter.
“We are pretty excited about the cost actions’ impact on this year,” said Ivana Delevska, chief investment officer at Spear Invest. Her firm built up a position in Shopify in the fourth quarter, betting on a rebound.
The earnings bump that Shopify is likely to get may be a leading indicator for other tech companies that were relative latecomers to cost cutting, such as Facebook owner Meta Platforms Inc. Shares of Meta surged on Feb. 2 after CEO Mark Zuckerberg pledged to make 2023 the year of efficiency.
Since the job cuts, Shopify has announced new partnerships, a flurry of updates for customers and a significantly higher pricing plan. Delevska said the combination of those efforts should be visible in the earnings. “I think there is going to be a bump at the next set of results,” she said.
Investors appear to have bought into the turnaround story. Shopify’s stock has jumped 38% this year while Amazon shares are up 19%. Indeed, it’s one of the five best-performing stocks in the MSCI World Information Technology Index in 2023 and traders are betting it has room to bounce further, with options pricing in an implied 9.5% move after earnings.
Shopify’s profitability plan is “likely to be the main focus area of attention” during its earnings call, Bloomberg Intelligence analyst Anurag Rana wrote in a report, adding that an e-commerce rebound is expected after Amazon’s third-party business unit posted 20% growth compared with consensus expectations of 7%.
To be fair, Shopify’s bounce comes after an outsized drop – even in the tech sector. The Ottawa-based company started 2022 as the most valuable in Canada, with a market value of C$217.8 billion and a 6% weighting in the S&P/TSX Composite Index, before a near record slide. Its performance last year was so dismal that it almost singlehandedly dragged the country’s main index into the red and affected the value of the pension holdings of every person working in Canada since the Canada Pension Plan Investment Board and the Caisse de Depot et Placement du Quebec are both shareholders.
The company, now valued at C$70 billion, has a long way to climb to regain its former glory. Analysts remain to be convinced, however. They forecast that Shopify will lose money every year through 2025, and their average price target for the stock over the next year is C$61.54, a drop of 5.4% from Monday’s closing level. It has only 20 buy ratings versus 23 holds and five sells.
Still, shareholders continue to expect growth over the longer term.
“With a low single-digit percentage of US retail sales currently flowing through its platform, and much less elsewhere, there is abundant scope for continued rapid growth,” Baillie Gifford investment manager Gary Robinson said in an email. The firm is Shopify’s second-largest shareholder and added to its holdings in 2022 because the shares didn’t reflect the “long-term opportunity.”
Tech Chart of the Day
Palantir Technologies Inc. shares rose as much as 20% in US premarket trading, set for their biggest jump since January 2021. The rally comes after the the data analysis company said it expects 2023 to be its first-ever profitable year.
Top Tech StoriesUS labor board prosecutors have concluded that Amazon.com Inc. illegally used subpoenas to coerce staff and try to interfere with labor activism at a New York warehouse.Taiwan Semiconductor Manufacturing Co.’s board of directors approved a plan to spend an extra $3.5 billion in its first plant in Arizona, currently under construction.Tsinghua Unigroup Co.’s main chipmaking arm is in discussions to raise as much as 15 billion yuan ($2.2 billion), a deal that could help reduce its debt load and propel an eventual initial public offering.Toshiba Corp. cut its full-year profit forecast and said its chief operating officer resigned after an investigation into his expenses, a pair of setbacks as the electronics giant tries to extract favorable terms in privatization talks.Indian fintech startup InsuranceDekho raised $150 million from a clutch of investors led by Goldman Sachs Asset Management, an unusually large investment round that will help it target an under-served domestic market.Tesla Inc. workers in New York state are launching a unionization campaign, teeing up a potential first for the electric-vehicle maker and the latest labor challenge for Chief Executive Officer Elon Musk.Samsung Electronics Co. will borrow close to $16 billion from its display-making subsidiary to help it sustain a blistering pace of investment. The Suwon-based electronics company signed a deal with Samsung Display Co. to borrow 20 trillion won at a 4.6% interest rate, the company said in a regulatory filing.
--With assistance from Subrat Patnaik.
©2023 Bloomberg L.P.