OTTAWA — Shopify’s stock took a sharp fall in early Thursday trading, as its first-quarter results fell well short of market expectations and it announced its largest-ever acquisition.

The commerce company reported adjusted net income of US$25.1 million between January and March, or US$0.20 per share, compared to analysts’ consensus estimate of US$0.64 per share as compiled by FactSet. Here’s a breakdown of the storylines that matter in Shopify’s first-quarter earnings:

The key number: Shopify brought in US$1.2 billion in revenue in the first three months of the year, up 21.7 per cent year over year. That’s by far the lowest growth rate the firm’s posted in any quarter since it went public in May 2015.

How they framed it: On Thursday, Shopify urged investors to look back further, pointing to two-year compound-growth figures that look a lot rosier than annual comparisons. Executives noted that the first quarter of 2021 was a record one, with US$988.6 million in revenue representing a 110.4 per cent jump from the prior year. During that three-month period, “online consumer spending on goods soared, fueled by government stimulus and lockdowns,” CFO Amy Shapero said on the firm’s earnings call. “The surge was not unique to Shopify.” 

Those trends drove gross merchandise volume (GMV)—a measure of transactions via the platform—up 114.2 per cent year over year in the first quarter of 2021. This year, the first-quarter figure was just 15.8 per cent. “Omicron easing was also a factor, with mobility resuming with vigour,” Shapero said, noting “a shift in consumer spend to offline retail and travel starting in early February this year.” She also cited shoppers’ inflation-induced preference for discount stores. 

Shopify makes the bulk of its revenue via fees for add-ons like payments processing, shipping and point-of-sale systems. Those fees are closely tied to its merchant sales—as goes GMV, so goes the company’s financial performance. 

The market reaction: Shopify’s stock fell below US$400 in early Thursday trading on the New York Stock Exchange, a level it hasn’t seen since January 2020. As of 10:30 am EDT, shares were trading at $399.76, down 17.8 per cent from Wednesday’s close. It’s been a bad week for e-commerce stocks, with Etsy and eBay dropping on weak projections for the second quarter.

A big deal: On Thursday, Shopify announced it is buying San Francisco-based Deliverr for US$2.1 billion, its largest-ever acquisition; Bloomberg first reported the two firms were in discussions last month. The 400-person Deliverr manages fulfillment for brands and retailers on Shopify, Amazon, BigCommerce and other platforms, letting clients offer U.S. shoppers two-day or next-day delivery. 

The acquisition “accelerates what we’ve been planning to do with this end-to-end logistics network,” Shopify president Harley Finkelstein said on the earnings call. “It gets us there faster.” The firm announced the Shopify Fulfillment Network (SFN) in June 2019, promising to use its technology and scale across its client base to let independent merchants offer their customers speed and service that would compete with what Amazon offers. But in February 2022, the company signalled a shift from its initial model of partnering with third-party logistics providers to operating more warehouses itself. 

Shapero said Deliverr will “add a couple of points of growth to Shopify’s topline in 2022,” but will put a slight strain on its profit margins for the year.

Shopify will largely pay cash for Deliverr—it ended March with US$2.45 billion in cash on its balance sheet—with 20 per cent of the purchase price in stock. Deliverr’s shareholders include Brookfield Technology Partners, a fund under the Toronto-based asset manager, as well as hedge funds turned private-market investors Coatue Management and Tiger Global Management. 

Shopify also announced it’s rolling Deliverr in with the parts of SFN it has built out so far and September 2019 acquisition 6 River Systems to create a new unit with its own CEO. It has appointed Kitchener, Ont.-based Aaron Brown, who joined the firm from Amazon in August 2017 to lead Shopify’s international expansion before taking a broader role overseeing its partner ecosystem.   

What’s next: Shopify is promising to spend “aggressively” on sales and marketing this year, and it’s looking to cross-sell clients on its ever-growing portfolio of merchant solutions. “We are training more of our sales and support teams to be able to highlight to merchants ways they can benefit from making fuller use of our platform,” Finkelstein said Thursday. 

For several quarters now, Shopify has signalled that the pandemic-driven acceleration of online shopping was a massive one-off wave they believe they’ve ridden well. While the surge has dissipated, Finkelstein still sounded an optimistic note. “Even with the current resurgence in offline retail, we still believe that e-commerce will continue to grow and take share of overall retail over the long term,” he said. 

One more thing…: In April 2021, iOS device users began getting notifications giving them the option to ask the apps they’d installed not to track them across other services and sites. Apple’s changes made it harder for advertisers on Facebook and Instagram to target and measure the effectiveness of ads; many of Shopify’s traditional merchant base of direct-to-consumer brands had used such ads to grow. 

Meta projects the iOS changes will cost it “on the order of US$10 billion” in 2022, CFO Dave Wehner estimated on a February analyst call, a figure he re-affirmed following the firm’s release of its first-quarter earnings Wednesday.

Shopify, however, insists it hasn’t been directly affected by Apple’s move. “There is no discernible impact we’ve seen so far,” Finkelstein said Thursday. “We do believe these changes have created some friction for merchants in advertising and have lowered their return on ad spend.” As in the past, he highlighted Shopify’s constellation of integrations with other places on the internet where brands can find buyers.

“Social commerce [is] gaining traction,” he said. “Orders placed on those services more than quadrupled this quarter [compared to] last year.” That includes newish links like TikTok and Spotify, and more established platforms like Google search.