A decorative mailbox covered in stickers is seen at Shopify's headquarters in Ottawa on Oct. 22, 2018.CHRIS WATTIE/Reuters
Shopify Inc. is the best-performing stock within the S&P/TSX 60 index this year, putting a lot of pressure on the e-commerce company as it gets ready to report its first-quarter results this week.
The share price has rebounded 36 per cent in 2023, outperforming other tech companies, popular gold producers, and even Teck Resources Ltd., which has seen its share price jump in a takeover battle.
Shopify’s gains follow a disappointing period last year for tech stocks, which struggled amid rising interest rates that weighed on valuations across the board. Many companies responded to lacklustre growth and a brewing recession with cost-cutting layoffs.
The share prices of Google parent Alphabet Inc., Facebook parent Meta Platforms Inc. and Shopify, among others, fell sharply. Yet, upbeat financial results from tech behemoths last week have recast the tech sector – for now – as a relatively safe and reliable performer during times of economic uncertainty.
“In a nutshell, the macro is not roses and champagne but overall tech earnings are holding up much better than feared from the doomsday crowd,” Daniel Ives, an analyst at Wedbush Securities, said in a note on Saturday.
Tech companies within the S&P 500 have reported an average 11.7-per-cent decline in their first-quarter profits compared with last year, according to data from Refinitiv. That’s significantly worse than the 1.9-per-cent profit decline for all companies that have reported their first-quarter results so far.
Nonetheless, tech companies have beaten profit estimates by an average of 10.3 per cent, which is better than most other sectors.
What’s more, some tech companies have delighted investors with upbeat results beyond profits.
Microsoft Corp.’s share price gained 7.2 per cent on April 26 after it reported better-than-expected sales growth of 7 per cent, year over year, powered by big gains in cloud computing.
Meta shares jumped 14 per cent after the social-media company reported that its sales increased 3 per cent in the first quarter. While modest, the result beat estimates and marked the company’s first growth in nearly a year.
Shopify, which develops software to help small and mid-sized companies sell online, headed into the year with rising interest from institutional investors. That could work in the stock’s favour if these same investors continue to increase their holdings.
According to a recent report from CIBC World Markets, mutual funds were vastly underexposed to Shopify at the end of 2022, relative to the stock’s weight within the broad S&P/TSX Composite Index. However, funds increased their share ownership by a substantial 32.5 per cent from June through December, suggesting professional investors see potential in the stock.
Shopify’s first-quarter results, expected after markets close on Thursday, will help determine if the pros are onto something – and whether the stock’s impressive rally this year is sustainable.
Analysts’ expectations are muted. They expect a quarterly loss of 4 US cents per share, according to FactSet.
More importantly, since the stock rarely responds to profit news, analysts expect sales will rise 17 per cent, year over year. That would mark a slowdown from 22-per-cent revenue growth in the same period last year.
Todd Coupland, an analyst at CIBC World Markets, suspects investor expectations are loftier after Amazon.com Inc.’s quarterly results last week, which showed that sales increased by 9 per cent. As a result, he believes Shopify will have to beat analysts’ sales estimates by more than 10 per cent to satisfy investors – a beat he thinks the company can accomplish.
Shopify’s outlook for the second quarter will likely prove just as important to the stock’s direction, though. Retailers and credit-card companies have warned that consumers are curbing their spending as the economy slows, and favouring services and essentials over discretionary items.
Kevin Krishnaratne, an analyst at Bank of Nova Scotia, said in a note on Monday that he expects Shopify’s merchants can deliver combined sales growth of 10.5 per cent in 2023. But, he added, “downside risk exists given how Shopify’s merchants skew heavily [toward] discretionary goods.”
Shopify’s share price is well off its recent lows. This week, investors will learn whether the gains are justified.
David Berman