OTTAWA — An extravaganza of holiday shopping helped Shopify finish last year strongly, but markets didn’t appreciate what the commerce company unwrapped in the fourth quarter.

The Ottawa-headquartered firm reported US$2.1 billion in revenue between October and December, up 23.6 per cent year over year. That beat analysts’ consensus estimates of about US$2.08 billion, as compiled by FactSet. Shopify also narrowly exceeded profit projections of US$0.30 per share, posting US$0.34 basic adjusted net income per share.

But retail investors saw trouble in the slim overperformance. Shopify’s stock dropped as much as 13.4 per cent on the New York Stock Exchange in Tuesday trading. 

Here’s what you need to know:

The key numbers: Shopify’s clients made US$75.1 billion in sales in the fourth quarter, up 23.2 per cent from a year earlier. That’s the best growth in gross merchandise volume (GMV) since the pandemic-induced shopping sprees of 2021, CFO Jeff Hoffmeister noted on a Tuesday earnings call, driven primarily by its current merchants selling more.

The company doesn’t sell directly to consumers, so it mostly makes money when its clients do. In the fourth quarter, the firm reported US$1.6 billion from its merchant solutions business, made up of fees for services like payment processing, merchant cash advances and loans, and marketing tools. 

Shopify’s take rate—its cut of transactions made via its platform—trended upward for years, as the firm rolled out ever more products and features. But it’s now contracted slightly in consecutive quarters. 

Citi analyst Tyler Radke called the take-rate figures “a modest miss,” noting that they may have contributed to the markets’ underwhelmed response to Shopify’s fourth-quarter results.

The bottom line: Profitability is the current watchword in both public and private-market tech. Shopify executives emphasized they’re holding down expenses and touted improving margins. Adjusted net income for 2023 totalled US$947 million or 13 per cent of revenue, up from US$47 million or one per cent of revenue a year earlier.

“We have a new shape to Shopify,” president Harley Finkelstein said, describing the company as “faster,” “flatter” and “far more agile.” Some of that comes from selling the firm’s logistics arm, which it offloaded last May to Flexport and Ocado. At the same time, Shopify laid off 20 per cent of its workers, closing last year with a staff of about 8,300, down from 11,600 at the end of 2022.

Hoffmeister promised to maintain that bottom line focus, saying the company would limit headcount growth and “continue to use AI and automation to internally make Shopify even more effective and efficient.” 

But markets weren’t sold. Radke pointed to Shopify’s projection that operating expenses will rise by a rate in the low teens, noting that it stands in contrast to “expectations of single digits, implying weaker profitability.” 

All about AI: Shopify is rolling the technology out to its staff and merchants, with gee-whiz new tools like image editing and an assistant. The company cited artificial intelligence in its securities filings for the first time Tuesday, touting significant opportunities but warning of challenges to realizing them. 

Data analytics, machine learning and AI are “increasingly informing our product development efforts,” according to Shopify’s annual report. But the firm faces competition, it warned, to recruit and keep workers with the technical and engineering skills to implement such emerging technologies. 

Shopify’s filings also noted the risk of regulatory changes restricting its ability to roll out some products, citing the prospect of new laws “governing the internet, online platforms, artificial intelligence and competition.” U.S. politicians have pushed—so far unsuccessfully—for antitrust restrictions targeting tech giants’ business practices, while regulators have launched cases against Amazon, Google and Meta. (Shopify’s merchants rely on all three to sell.)

Authorities everywhere are looking to set new AI rules. Shopify’s filings note the “rapidly evolving and uncertain” social, ethical, regulatory and legal issues around the technology’s development and use, and the “significant scrutiny” it is receiving. “If our use of artificial intelligence is restricted, our business may be less efficient, or we may be at a competitive disadvantage,” the annual report stated.

Shopify CEO Tobi Lütke—who no longer takes part in earnings calls—has used stronger language in the past. Last September, he tweeted that the firm wouldn’t support Ottawa’s voluntary generative AI code of conduct. “We don’t need more referees in Canada,” he wrote. “We need more builders.” 

Continental effects: Shopify makes most of its money in the U.S., but business in overseas markets grew faster than those closer to home last year. Europe, the Middle East and Africa contributed nearly US$1.26 billion in 2023, 17.8 per cent of the US$7.06 billion total. Revenues for the region rose 36.9 per cent year over year, outpacing overall growth.

Finkelstein attributed the boost to Europe, where merchants grew sales 40 per cent in the fourth quarter.