Shopify’s Surprise Third-Quarter Loss Jolts Investors

Shopify’s Shares of Shopify (SHOP – Get Report) plunged Tuesday after the e-commerce company delivered up a big earnings fail, even as some industry experts contend investors may be overreacting. Shopify’s stock price dropped 7.14% to $301.72 after the Ottawa-based company reported an adjusted loss of 29 cents a share for the third quarter.

Shopify

That’s a reversal from the third quarter of 2018, when the Canadian e-commerce company reported net income of $5.8 million, or 5 cents per share. The results also fell well below Wall Street expectations, with analysts surveyed by Zacks Investment Research having forecast a 175% surge in net income to 11 cents a share. The loss shook up investors, who retreated from the stock of the fast-growing e-commerce company even as it reported a big revenue beat.

However, a closer look at Shopify’s quarterly results show no reason to panic, argued Timothy Collins, a financial planner and contributor to The Street and Real Money. A big chuck of Shopify’s $72.8 million loss was due to a tax charge of $48.3 million, he noted.

Once you take into account the tax charge and add back in stock-based compensation and payroll taxes, you wind up with a gain of 15 cents a share, or above the 11 cents a share industry analysts had forecast. “The challenge for Shopify this quarter wasn’t competition, it was the provision for income tax that hit its bottom line,” Collins said. “I think investors overreacted to another strong quarter out of fear. We hear Facebook, we hear Square, we hear “surprise loss,” and we immediately hit the sell button. The bottom line wasn’t nearly as bad as the headlines read.”

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Another drag on Shopify’s bottom line has been its aggressive expansion, with the e-commerce company having announced over the summer to spend $1 billion building out fulfillment centers across the United States, taking a page from Amazon’s AMZN playbook. Shopify’s loss for the quarter, in turn, was also balanced by a big jump in revenue. Shopify reported a 45% surge in revenue to $390.6 million, edging past the estimate of analysts surveyed by Zacks and FactSet, who had pegged revenue at $384.05 million and $383.8 million, respectively. Shopify’s two major revenue streams, merchant and subscription revenue, both topped analysts’ estimates for the third quarter.

Tobi Lutke, Shopify’s CEO, said in a press statement that the e-commerce company now has more than a million merchants on its platform around the world. “These merchants chose Shopify because we’re making entrepreneurship easier, and we will continue to level the playing field to help merchants everywhere succeed,” Lutke said.

Still, Shopify faces growing competition in the e-commerce sector it has helped pioneer. Through its Instagram subsidiary, Facebook (FB – Get Report) rolled out in-app checkouts, allowing users to buy items directly while on the app. Square (SQ – Get Report) now allows retailers and other business owners to set up digital storefronts and sell directly to customers through Square’s online store platform. “The  company’s innovative business model inevitably led to rival competitors attempting to copy and beat Shopify at its own game,” Zacks noted.