Shopify: Employee Comp Concerns Won’t Impact Long-Term Potential

In my previous article, I put Shopify (NYSE:SHOP) through my investing framework and came to the conclusion that it was a ‘strong buy’. It has been a business that I have long admired, and the dramatic share price pullback seemed like a perfect opportunity for long term investors.

Yet the short-term headwinds continue, with new ones seemingly popping up every week – the question is, will these affect Shopify in the long term?

Business Overview

To give a quick overview, Shopify is a leading ecommerce infrastructure provider that gives its customers the tools to help them start, grow, market, and manage a retail business of any size.

The company is built around two different segments. It has subscriptions solutions that give customers access to the Shopify platform, and it has merchant solutions, which provide additional tools and functionalities for merchants, such as Shopify Payments or Shopify Fulfilment Network.

But the company has faced difficult times of late; not only has the macroeconomic environment been challenging, but Shopify has been facing problems within the company itself.

Employee Compensation Concerns

It was reported in April 2022 that Shopify would allow its staff to have more flexibility in their choice of compensation between cash and stock components, with the changes expected to start in July. This was driven by rumblings of employee dissatisfaction, as Shopify’s share price had crashed by ~60% from its 52-week high as of April.

Fast-forward to July, and it feels like Shopify is still having issues. The company recently announced that it would delay this compensation package overhaul, pushing it back until September according to sources. It has also laid off at least 50 employees since April, whilst delaying job offers to dozens more.

We’ve all been reading about The Great Resignation, and know that the ability to attract and retain talent is particularly crucial for technology companies. So, the question now is can Shopify manage their employees successfully and ensure that they have a wealth of talent?

In Shopify’s Q1’22 Earnings Call, analyst Tom Forte put forward a question to CEO Tobi Lütke about the company’s ability to attract and retain tech talent in a tight labor market, particularly given the weakness in Shopify’s shares. This is Lütke’s response, although I have removed some of the fluff where possible & highlighted some key statements:

Yes. It’s Tobi. I’ll take that. Well, I mean we have amazing people coming… obviously, it comes up, the share price, obviously, people are making economic decisions in these kind of things, but maybe not quite as much as people think… What we find is people who are really, really interested in finding companies that are mission aligned with what they’re doing, what they want to see, the change they want to see in the world… a lot of people have had personal experience helping local businesses, many family businesses setting up Shopify stores during this time and have been sort of like in the orbital pull of coming to local Shopify to help more people in the same way, but from the inside instead of from the outside. So there were factors which are much more significant.

We’ve all seen the articles about The Great Resignation, and like I think this has been largely misreported. There has been a big shuffle in the industry…But we are not really seeing this. So — in fact, I think like the company is bringing in incredibly high talented people. It’s — I’m almost humbled by the — like the incredible people I get to work with.

And like retention, it’s been — again, there is more shuffling in general. And like I think locality is — like people can now work for companies everywhere in the world, and so people are trying out what that’s like. Funnily enough, we’ve actually seen a very large group of people coming back recently. Like that’s — I think actually my colleagues are talking about this too where this is actually almost a more notable trend right now than people like turning over quicker. It’s the boomerang effect of people coming back to the companies that they started out in the pandemic.

…The stock price is something that factors into this, but it’s one input of many. And it’s — like most people tend to understand that, the stock price is a sort of snapshot in time in a variable where people are making more long-term choices now.

Perhaps it’s no surprise that Lütke would look to play down potential employee concerns; this is difficult for investors to measure, so there’s almost an element of ‘trust us, it’s fine’ from Shopify.

Perhaps one place we can look to gauge the mood is Glassdoor. Shopify has an overall score of 4.2 and gets great scores across the board from its 1,817 reviews.

The useful thing about Glassdoor is that is shows trends over the past ~18 months, so we can get an idea about how things are going at Shopify – looking at the overall score there is a very small dip but nothing to worry much about.

There is a downward trend in Compensation and Benefits, but only moving from about 4.3 stars to 4.0; this is not a surprise, as nobody is denying that employees at Shopify are currently worse off than they were in early 2021 given the share price decline.

Yet judging by these scores and CEO Tobi Lütke’s comments, I don’t think there is cause for concern yet. It’s certainly something to watch, but we are in an inflationary, recessionary environment, and employees across the world are feeling the strain.

It’s also worth highlighting that losing a certain number of employees might not be terrible for a company like Shopify. We have seen businesses, particularly pandemic beneficiaries, who rapidly increased headcount over the past couple of years and now find themselves severely overstaffed. Shopify itself saw a substantial spike in employee hiring throughout 2020 and 2021, but if the company is a bit ‘bloated’ right now, then I’m sure Shopify would rather employees leave optionally instead of having to rely solely on layoffs.

Thankfully, Shopify still looks like a great place to work, even if there are these short-term cost control measures coming into play.

Long-Term Opportunity Remains

There’s no denying that Shopify is facing a number of short-term headwinds; a crashing share price hitting employees’ stock-based compensation and shareholders’ investments, macroeconomic conditions hitting the consumer, and ecommerce being hit twice as hard due to its success in 2020 and 2021.

But I am not a short-term investor, and I feel like there’s still a huge opportunity for Shopify over the upcoming decade. Oppenheimer released a report last year suggesting that Shopify’s global commerce TAM will reach ~$255B by 2025. To put that into perspective, Shopify saw revenues of $4,827m for the past 12 months – or, less than 2% of this forecasted TAM. Given that Shopify is a leader in this industry and should be able to take a sizeable piece of the pie, I think Shopify’s story lies firmly in the future.

The company continues to move upmarket with its customers, increase the solutions offered, expand spend with existing customers, and it recently agreed to acquire fulfilment technology provider Deliverr for $2.1 billion to accelerate the build out of its fulfilment network. Even in a broader sense, Shopify has a lot going for it.

Current Valuation

In my previous article, I outline all the assumptions for my valuation model – nothing has changed apart from some minor tweaks to the 2022-2025 multiples (to provide what I believe to be more mid-term accuracy), and I have simply updated the market capitalization: it highlights to me the potential opportunity for Shopify’s shares at the current price.

Bottom Line

Shopify is a company that is covered in dark clouds at the minute, but the important thing to remember about dark clouds – they always clear to reveal brighter skies. I don’t think any of the recent news about Shopify is a long-term cause for concern; we are in a difficult business environment where no company is immune, and I think the market has severely overreacted when it comes to Shopify.

I believe this latest report about employee compensation to be just another dark cloud over Shopify’s business, and this too will eventually fade away and reveal a brighter future.