The Wrong Bet

To say investors -- and tech investors, in particular -- have been nervous heading into earnings season would be an understatement. One more example: Shares of Shopify tumbled 14% today after the e-commerce software firm said it was laying off 10% of its staff. Shopify's software, which helps businesses and entrepreneurs create e-commerce websites, was in heavy demand early in the pandemic. 

Today's selloff is stunning given that Shopify stock was already down 73% heading into the open. It's one of the best examples of a company that soared on lockdown trends and then struggled to adjust as consumers sputtered back toward normalcy.

Shopify's CEO and founder Tobi Lütke was surprisingly candid in discussing those struggles in a blog post today about the layoffs. He explains how Shopify -- and so many other companies -- went wrong as pandemic demand soared: 

When the Covid pandemic set in, almost all retail shifted online because of shelter-in-place orders. Demand for Shopify skyrocketed. To help merchants, we threw away our roadmaps and shipped everything that could possibly be helpful. It was hard, but we know for a fact that more merchants’ businesses survived the pandemic because of the work we did in this time and that’s exactly what our mission is about.  

Shopify has always been a company that makes the big strategic bets our merchants demand of us -- this is how we succeed. Before the pandemic, e-commerce growth had been steady and predictable. Was this surge to be a temporary effect or a new normal? And so, given what we saw, we placed another bet: We bet that the channel mix -- the share of dollars that travel through e-commerce rather than physical retail -- would permanently leap ahead by 5 or even 10 years. We couldn’t know for sure at the time, but we knew that if there was a chance that this was true, we would have to expand the company to match. 

It’s now clear that bet didn’t pay off. What we see now is the mix reverting to roughly where pre-Covid data would have suggested it should be at this point. Still growing steadily, but it wasn’t a meaningful 5-year leap ahead. Our market share in e-commerce is a lot higher than it is in retail, so this matters. Ultimately, placing this bet was my call to make and I got this wrong. Now, we have to adjust. As a consequence, we have to say goodbye to some of you today and I’m deeply sorry for that.

Shopify reports earnings tomorrow morning. Analysts expect profit to be down 89% from a year ago.