It's unhappy times for Shopify (SHOP 2.58%) shareholders. The stock price has plummeted nearly 80% from its all-time high in just a six-month period. Growth is slowing as it laps the booming revenue expansion from early on in the pandemic, and worry is mounting that inflation and aggressive U.S. Federal Reserve interest rate hikes could dramatically slow -- or worse, even crash -- the global economy.
Now investors can add one more item to the list of concerns: Shopify reported a $1.47 billion net loss in Q1 2022, compared to a $1.26 billion net profit a year ago. During the full-year 2021 financial update a few months ago, Shopify outlined how it would ramp up its investment in its shipping and logistics segment Shopify Fulfillment Network (SFN) in the next couple of years. This concerned some shareholders as Shopify continuously moves away from its ultra-asset-light and profitable e-commerce software business as it tries to woo over more merchants from platforms like Amazon.
However, investment in SFN is not to blame for the big Q1 2022 net loss -- far from it. Shopify is still a nimble commerce technologist, as the biggest blame for the Q1 red ink were its equity investments.
A reminder on Shopify Fulfillment Network spend
SFN will be a big investment for Shopify, but not yet. Management has said it will spend $1 billion to expand its warehousing, inventory, and order fulfillment capabilities in 2023 and 2024. Ahead of that, management had said capital expenditures (property and equipment) in support of SFN would ramp up, and indeed they did in Q1 2022. Capital expenditures were $15.9 million in Q1 2022 compared to just $5.2 million a year ago.
That said, $15.9 million is nothing for Shopify, even in a single quarter. Granted, $1 billion in spending over the course of two years (starting next year) is a bigger deal. The acquisition of logistics start-up Deliverr for $2.1 billion to aid in SFN expansion was also just announced.
But still, with over $7.2 billion in cash and short-term investments on hand as of the end of March 2022, Shopify can afford these expenses. Further, neither of these items were contributing factors to the bottom line turning deep red.
When good equity investments behave badly
SFN, Deliverr, and other logistics investments will be a Shopify concern for another day. But over the first three months of 2022, the real drag on net income was Shopify's equity investments.
And what exactly are those equity investments? In its quarterly filing, the company said it had received stock in then-private fintech outfit Affirm (AFRM 2.01%) in July 2020 worth just under $25 million. Affirm went public in January 2021, and the value of Shopify's equity stake has rocketed all the way to $939 million as of March 31, 2022.
What could possibly be wrong with that kind of equity investment return? This is a more than $1.1 billion unrealized loss from Affirm stock's publicly traded market debut a year ago.
That's not all. Shopify has also made and received multiple equity investments in cross-border commerce software outfit Global-e Online (GLBE 2.32%). The total value of these investments was nearly $711 million as of the end of March, resulting in unrealized losses of $581 million. Again, the tech stock market crash can be blamed, as can be seen from Global-e's performance since its IPO in May 2021.
And there's one more item: cryptocurrency bank Silvergate Capital (SI 30.44%). Shopify was a participating member in Diem Association, the crypto project that was formerly being headed up by Meta Platforms (Facebook). Assets of Diem Association were sold off to Silvergate on March 1, and in return, Diem Association members (Shopify included) received cash and Silvergate stock.
Shopify recorded a $1.66 million loss related to the sale of Diem Association, but Silvergate stock received was initially worth $8.3 million. By the end of March, it was worth $9.8 million, but a crypto bloodbath has ensued since then. That means a likely very small unrealized loss will be reported on this holding in Q2 2022.
Investing in stocks is volatile for big companies too
In total, Shopify recorded unrealized losses of $1.68 billion on these stocks during the first quarter, slightly offset by equity gains elsewhere in its portfolio. This was the primary cause of Shopify's net losses to kick off 2022. Investing in stocks can be a wild ride for big businesses just as much as it is for individual investors.
That doesn't mean these holdings in Affirm, Global-e, and Silvergate Capital are a bust for Shopify. Investing is a long-term journey for large organizations, often even more so than it is for individual investors. And just for the sake of emphasis, the company has over $7.2 billion in cash and equivalents on hand, plus the $2.89 billion in equity and other investments recorded on its balance sheet, offset by convertible debt of just over $911 million.
After the Q1 net loss, Shopify is no longer the "cheap" software stock some investors thought it was (shares were briefly under 30 times trailing 12-month earnings in March). But that doesn't diminish its long-term prospects. Shopify remains in tip-top shape as it begins to pour money into logistics technology to strengthen its relationships with merchants.