There’s no denying that Shopify (NYSE:SHOP) stock hit a grand slam with the company’s quarterly results, released earlier this month.
It’s also encouraging to know that Shopify plans to focus on its core e-commerce business and will cut costs by reducing its headcount. On the other hand, investors might want to take it slow with SHOP stock if they feel that it’s overbought now.
Shopify is one of a handful of bellweather U.S. e-commerce businesses, so it’s a big deal when the company announces its quarterly financial data. It might even be said that Shopify’s growth is a sign that America’s economy is thriving, or at least recovering.
Curious investors will surely want to know about Shopify’s plans for the near future. If Shopify can stay competitive and concentrate on e-commerce without undue distractions, this could be a win-win for the shoppers, merchants and shareholders.
Layoffs, the Logistics Assets Sale and Shopify
Without a doubt, Shopify’s first-quarter 2023 financial results, released on May 4, were very impressive, and we’ll delve into the data in a moment. However, there were two pieces of news that definitely caught investors’ attention.
First and foremost, Shopify plans to reduce its headcount by roughly 20%. That’s not great news for anyone who’s being let go, but it means Shopify can reduce its overhead and, hopefully, be a more profitable business.
In addition, Shopify has agreed to sell most of its logistics business to Flexport, a global logistics company. In exchange for this, “will receive stock representing a 13% equity interest in Flexport, on top of its existing equity interest.”
Hence, Shopify is slimming down in multiple ways and focusing on the e-commerce business that made the company a household name.
Plus, Shopify can still make money if its formerly owned logistics assets thrive while under Flexport’s control. It’s a sensible strategy that Shopify’s stakeholders should appreciate.
Is SHOP Stock Overbought?
Before we move on to other topics, let’s break down Shopify’s first-quarter 2023 results. The company’s adjusted earnings of 1 cent per share beat the analyst consensus forecast of a loss of 4 cents per share.
Furthermore, Shopify posted $1.5 billion in quarterly revenue, up 25% year over year. That result exceeded Wall Street’s call for $1.4 billion in quarterly revenue.
And that’s not all. Analysts predicted that Shopify would record $47.7 billion in gross merchandise volume. However, the actual result was $49.6 billion, up 15% year over year. Shopify’s free cash flow improved dramatically. The company had negative free cash flow of $41 million in 2022’s first quarter, but then reported positive free cash flow of $86 million in Q1 2023.
These are outstanding results. Yet, Atlantic Equities analyst Kunaal Malde has a concern. Evidently, Malde believes that the market “has quickly reacted” to “positive developments” surrounding Shopify. Atlantic Equities analyst downgraded SHOP stock on valuation.
Specifically, Malde lowered his rating on Shopify shares from “overweight” to “neutral.” However, interestingly enough, Malde raised his price target on the stock from $55 to $65. Thus, perhaps the analyst isn’t bearish on Shopify despite his valuation-related concerns.
Stay Small or Just Wait With SHOP Stock
Shopify’s layoffs appear to be part of the company’s strategy to slim down and stay focused. This, along with Shopify’s excellent quarterly results, bode well for the company.
If Malde’s concerns about Shopify’s valuation resonate with you, there are a couple of approaches you can take. One idea is to keep your position in SHOP stock small, and consider scaling in if the stock goes down.
Or, you can just be patient and do nothing, and reevaluate your strategy if the Shopify share price declines. Meanwhile, stay tuned for updates as Shopify pursues a smart strategy to cut costs and concentrate on e-commerce.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
