Shopify (SHOP -2.37%) just cleaved off about 20% of its business, and Wall Street couldn't be happier.
The company in early May announced that it is selling off its logistics segment so that management can focus more on the platform's core growth mission. Shopify also announced first-quarter results along with an updated outlook for the 2023 fiscal year.
Let's take a closer look at these shifts, and whether they make the stock an obvious buy following the recent share price surge.
Good growth
Putting aside the logistics sale, Shopify's Q1 results were excellent. Sales volumes were up 18%, marking a slight acceleration compared to the previous quarter's 17% boost. Overall revenue was up 27% year over year, easily beating the company's broader 2023 outlook calling for growth in the high-teen percentage range. Management said in a press release that these results "demonstrate once again that we're the go-to solution powering businesses of all sizes."
There were encouraging signs on profitability, too. While Shopify generated significant operating losses, gross profit margin improved to 48% of sales from 46% of sales in the previous quarter. Executives had forecast roughly flat results on this score, and so the increase implies an easier time returning to overall profitability.
Shifting strategies
There's no avoiding the massive strategic shift that the tech giant announced in conjunction with its Q1 update. "Shopify will be smaller by about 20%," CEO Tobias Lütke said in a letter to employees that was made public. The company is partnering with Flexport, which is buying its logistics business, and it will continue to own an equity interest in the company. But it will no longer seek to incorporate its own logistics solutions into the platform.
The idea is that by selling this unit Shopify will be free to focus on its core growth initiatives that revolve around making the best e-commerce platform available for merchants doing business online and offline. "We are heading into a decade of high velocity and massive change," Lütke said. The company likely has a clearer path toward profitability, too, given all the fixed costs associated with shipping fulfillment that it no longer needs to offset.
Is it time to buy?
Wall Street was clearly pleased with the news as share prices jumped over 20% in the immediate wake of the Q1 update. On the bright side, Shopify raised its 2023 outlook on both the top and bottom lines, projected positive cash flow for each quarter of the year, and said operating expenses will decline over the next several quarters.
Taken together, these metrics show a clear path back toward profitability ahead. Shopify's higher fees didn't seem to spark an exodus of merchants in early 2023, either. That's great news for more than just the immediate earnings boost. It is evidence that Shopify is on a good growth path that relies on a growing portfolio of services to increase income from its merchants, even as the pool of sellers expands over time.
Logistics is a huge service that Shopify won't directly profit from after that segment is sold. But the remaining business seems primed for faster growth and better cash flow trends. Investors should see these changes as good reasons to consider buying the growth stock today.
