Shopify to Cut 20% of its Workforce: What it Means for Investors

Shopify (TSX:SHOP) stock jumped 25%, as it announced it will cut 20% of its workforce and sell its stake in Flexport.

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Shopify (TSX:SHOP) shares were up about 25% on May 4, as the e-commerce company made the tough decision to cut 20% of its workforce. With the second round of layoffs, Shopify also decided to sell off its freight forwarder, Flexport.

Why happened?

The news came as Shopify stock reported better-than-expected results for its first quarter. Gross merchandise volume (GMV) increased 15% from the first quarter of 2022, with total revenue up 25%. Subscription solutions revenue also increased by 11% year over year, with monthly recurring revenue (MRR) up 10%. Its operating loss increased, however, to 13% of revenue. This was an increase from 8% of its revenue the year before.

Even so, the company’s newest move and earnings seemed to demonstrate to investors at least that Shopify stock was still attracting customers. Further, it shows that Shopify managed to increase subscription fees and realized that global expansion probably isn’t where the future lies for this stock.

That’s good news for investors, as Shopify stock may turn to more manageable growth in the future. More enterprise businesses have picked up the stock in the meantime, and it’s sold off acquisitions to bring in more cash. This included Deliverr for US$2.1 billion last year and now includes a 13% stake in Flexport — the value of which is unknown at this time.

What analysts had to say

The first earnings report of Shopify stock was impressive, to say the least. It far outweighed analyst estimates, and this could lead to an early increase in share price, according to one analyst.

The sale of its 13% stake in Flexport was also positive for analysts, as was the layoff of the 20% of staff. This amounted to about 2,000 employees, with cuts incurring about US$150 million in severance payments. The main focus, according to reports, were higher-paying managerial roles, as the balance was “unhealthy,” stated Chief Executive Officer Tobi Lütke.

It was a terrible choice after the decision to expand too rapidly. However, hopefully this means the end of layoffs for Shopify stock. Yet because of these moves, analysts are now feeling more confident that Shopify stock will continue to rise in the next few quarters. This could even be during a recession, as companies move online to bring costs down.

Now what?

Analysts believe this move will allow the company to focus on profits through sales from its online platform. It’s how Shopify stock became so successful in the first place, so it’s time to get back to those roots. There will be no more “side quests,” Lütke stated.

“Technological progress always arcs towards simplicity, and entrepreneurs succeed more when we simplify … Our main quest demands from us to build the best thing that is now possible, and that has just changed entirely.”

CEO Tobi Lütke

Part of that quest should lead to more use of artificial intelligence, Lütke said, to make it easier for both Shopify merchants and the company to perform well. So, it’s goodbye to global domination and hello to simplification for Shopify shareholders today.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Amy Legate-Wolfe has positions in Shopify. The Motley Fool has positions in and recommends Shopify. The Motley Fool has a disclosure policy.

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