Shares of Shopify (SHOP -1.81%) were crushed on Tuesday, tumbling as much as 17.2%. As of 10:24 a.m., the stock was still down 16.2%. The catalyst that sent the e-commerce-tools provider plunging was the decision to significantly reduce its workforce amid slowing online sales growth.
In a missive to employees on Tuesday, CEO Tobi Lütke said Shopify plans to lay off 10% of its staff, or roughly 1,000 workers, by the end of the day. The bulk of the dismissals are coming from the sales, support, and recruiting areas.
More important to investors was Lütke's commentary about the reason for the downsizing. At the height of the pandemic, the Shopify "bet that the channel mix -- the share of dollars that travel through e-commerce rather than physical retail -- would permanently leap ahead by five or even 10 years ... It's now clear that bet didn't pay off ... I got this wrong."
Lütke went on to say that while many of the previous innovations the company has made helped it grow into "something bigger," Shopify would now concentrate on becoming "more focused, more driven, and more singular in mission."
Perhaps most telling was a chart Lütke shared, which showed the overall adoption of e-commerce. It suggested that the initial surge in online sales brought on by the pandemic has shifted, reverting closer to its historical growth rate. This seems to confirm investor's worst fears that the rate of online sales growth has permanently downshifted into a lower gear.
Shopify's workforce has grown substantially in recent years, increasing more than fivefold from 1,900 in 2016 to about 10,000 in 2021. The confirmation that e-commerce growth has stalled, resulting in employee layoffs, has investors wondering what the future may hold.
Yet in the first quarter, online sales in the U.S. represented just 14.3% of total retail, up from roughly 5.5% a decade earlier. This suggests that while the path forward for digital retail may be slower than previously envisioned, the adoption of e-commerce is far from over, playing out over decades, not quarters.
Patient investors will do best to remember that time is on their side. Shopify's growth, while slower, will continue, and today's share-price decline will likely represent a long-term buying opportunity.