2022 has been a rough year for e-commerce software giant Shopify (SHOP -2.37%), and the second-quarter earnings update brought little reprieve. Slowing revenue growth (up 16% year over year) was a problem. But the spotlight was turned on the bottom line in particular. Net losses tallied up to $2.68 billion through the first half of the year, compared to net income of $2.14 billion during the same period a year ago. Ouch!  

But not so fast. Those net losses (and the net gains from last year, for that matter) aren't exactly what they appear to be. Shopify is indeed losing cash this year, but not nearly at the rate indicated by the "net loss" line item. Here's what's going on.

Net loss is not the same as cash outflow

Have your tech stocks been blown up by the bear market this year? If so, you're in the same boat as Shopify. Same as last quarter, the majority of Shopify's net losses in Q2 were attributable to its equity investments. 

That's right -- on a statement of income, quarterly changes in equity investments are listed as "other income or losses." So what was a massive gain in equity values last year is now headed in reverse as the market brings high-flying tech stocks back to earth. Here's a comparison of Shopify's bottom line so far this year to the first half of 2021.


Shopify First Half 2022

Shopify First Half 2021

Income (loss) from operations

($288 million)

$258 million

Other income (expense), net

($2.56 billion)

$2.03 billion

(Provision for) recovery of income taxes

$173 million

($151 million)

Net income (loss)

($2.68 billion)

$2.14 billion

Data source: Shopify.  

Don't get me wrong; Shopify's e-commerce business has swung to an operating loss. However, losses aren't as extreme as they may appear. On a free cash flow basis (operating income or loss, minus capital expenditures on property and equipment), Shopify has lost only $206 million -- not $2.68 billion as indicated in the chart above.  

The takeaway here is that nearly all of Shopify's reported net losses so far in 2022 are from declines in the stock market. Conversely, almost all of its net income this same time in 2021 was from gains in the stock market. Just like individual investors have had to deal with the bear market, so has Shopify. And according to the company's regulatory filing, it hasn't locked in much in the way of any material losses yet (by selling stock) in its equity investments.

Where Shopify has parked its investments

So which stocks specifically account for Shopify's recent investment declines? Buy now, pay later specialist Affirm Holdings and cross-border sales software provider Global-E Online. Shopify's investments in both of these companies were the result of business partnerships it struck with each of them to help bolster software offerings for Shopify merchants. As of June 30, the value of these investments was listed at $801 million (just over half of which was attributable to Global-E), compared to $3.21 billion at the start of the year.

Given how both stocks have fared as of late, it comes as no surprise Shopify reported big losses last quarter.

AFRM Chart

Data by YCharts.

For what it's worth, both stocks have rallied off of recent lows since the end of June, so Shopify's net losses could moderate in the third quarter if that rally holds. However, just as investing is a long game for you and me, the same goes for Shopify. If Affirm and Global-E keep expanding, their stock prices will (eventually) follow suit. Patience is required. 

The good news is that after the Q2 update, Shopify's balance sheet remains in good shape. It reported $6.96 billion in cash and short-term assets, plus another $2 billion in long-term investments (equities like Affirm and Global-E, as well as long-term bonds), offset by debt of just $912 million. Shopify's bottom line may look ugly right at the moment, but it's in far better condition than it appears at first blush.