Shopify (SHOP +3.18%) stock soared on its earnings report last week, but the big news wasn't the company's first-quarter results.
It was the company's decision to sell off Deliverr, the logistics company it acquired less than a year ago, and the rest of the Shopify Logistics division. Additionally, the company is selling Six River Systems, a logistics company known for its mobile robot, to grocery fulfillment company Ocado.
While the decision to sell Deliverr to Flexport may sound like a failure of its original plan to move deeper into logistics and fulfillment, selling to Flexport looks like a win-win. Shopify isn't folding its ambitions in logistics by any means. It's finding a strategic partner and moving the heavy expenses associated with logistics off its books.
NASDAQ: SHOP
Key Data Points
What is Flexport?
Flexport is a logistics fulfillment and technology company that ships goods globally. It offers a high-tech platform that gives customers real-time visibility over their shipments and enables them to optimize their inventory and manage their supply chain more effectively.
Founded in 2013, Flexport has more than 10,000 customers today, many of whom overlap with Shopify.
The privately held company's revenue more than doubled in 2021 to reach $3.2 billion and it reported a positive operating profit. It was valued at $8 billion in a funding round in early 2022.
Currently, Flexport's CEO is Dave Clark, the former CEO of Worldwide Consumer at Amazon, who was largely responsible for building Amazon's own massive logistics network.
As part of the deal, Shopify will get a 13% stake in Flexport on top of its previous stake and will have the ability to name a director to Flexport's board. In what's effectively a strategic partnership between the two companies, Flexport will become the official logistics partner of Shopify and the preferred provider for Shop Promise, a badge that lets customers know that their order is guaranteed to arrive in five days or less.
With the move, Shopify doesn't seem to lose any of the progress it's made in providing logistics services for its business, but it also improves cash flow and profits by removing a capital-intensive business.
A familiar playbook
Shopify's chief rival is Amazon, and the company has made no secret of that. Shopify CEO Tobi Lütke likes to describe his business of providing e-commerce software to small and large sellers as "arming the rebels," presumably against Amazon.
Shopify and Amazon have long competed against each other both indirectly and directly. Earlier this year, Amazon launched Buy with Prime, which allows Shopify sellers and other third-party sellers to use Prime shipping services for Prime customers on their own websites.
Shopify has also partnered with other Amazon competitors, including Walmart, allowing Shopify merchants to sell their products on Walmart.com, and a partnership with Google Cloud provides hosting services and other features like a new artificial intelligence (AI)-powered browse feature to optimize the order of product listing on seller websites.
The e-commerce software company also partnered with social media companies like Meta Platforms and Pinterest to help its sellers get customers through the social channel.
Is Shopify stock a buy?
Shopify beat analyst estimates on the top and bottom lines in its first-quarter earnings report, but the company's revenue growth has slowed substantially from the heady days of the pandemic or prior to that when it was still rapidly growing its seller base.
With annual gross merchandise volume around $200 billion now, rapid top-line growth may become more difficult. As you can see from the chart below, revenue was up a solid 25% in the quarter to $1.5 billion, but gross merchandise volume rose just 15%, or 18% in constant currency, to $49.6 billion.
The good news is that Shopify's profits should ramp up now that it doesn't need to spend on logistics and because it just raised prices on subscriptions. The company also said it would shrink headcount by 20% due to layoffs and the Deliverr sale.
Shopify stock is expensive, but at this writing, shares are up 38% since the earnings report came out -- a clear sign that investors approve of the Flexport deal.
Meanwhile, in a difficult environment, Shopify continues to outgrow peers like Amazon, and the company looks poised to ramp up profitability as it expects a decline in adjusted operating expenses compared to the first quarter.
If Shopify can deliver the bottom-line growth that investors are looking for, it still has a lot of room to run from here.
