Angelo Zino, Senior Equity Analyst at CFRA Research, joined Closing Bell's Kristen Scholer to discuss the macroeconomic factors leading to a decline in online shopping, following  pandemic-induced boom in e-commerce.

Closing Bell

Shopify to Lay Off 10% of Workforce Amid E-commerce Decline

Welcome back to closing bell on cheddar news, everyone. Well, shares of e commerce company Shopify tanking after announcing that it's gonna be laying off 10% of its workforce. And these layoffs, which will affect about 1000 workers come as consumers switch back to old shopping habits, pulling back on online orders. Well, it's certainly been a dismal year for the company caters to small and medium sized online businesses, stocks down 73% this year, it's down 82% from its high and mid november. So this is dramatic and actually below at this level Where it was even during its low of the initial onset of the pandemic in March of 2020. So again, this is pretty dramatic. But joining me now is Angelo Zino, senior equity analyst at C. F. R. Research. Angelo. How is it so bad for Shopify? What's behind this? Yeah, I mean I'd say it's it's really kind of two fold, right? I think um one, this was a company that has seen its revenue essentially tripled over the last two years, quadruple over the last three years, right. I mean is a company that has really kind of been probably the biggest beneficiary amidst kind of the pandemic that we've seen over the last several years and um they've kind of made this really big bet where they basically expected kind of some of the trends that we've seen here in recent years to be permanent in nature. And the fact of the matter is it's absolutely, it doesn't appear like it is permanent in nature. It looks like we're kind of reverting to some extent um to where the trajectory would have been over the last kind of three years if the pandemic never occurred. So essentially we're kind of now entering this period where um you know more and more consumers are clearly going to the brick and mortar aspect of things when you combine that with kind of what we're seeing in the broader economy, the deterioration there um that's really having a huge negative impact on Shopify here. So when you kind of look at where the assumptions are in the street here for Q. two and more importantly in the second half the year in 2023, they've got to get ratcheted down a whole lot here probably tomorrow when they report. So I'm just curious what this might say about the state of the economy. Angelo. Certainly in amazon's latest report, the biggest e commerce retailer out there, we did see a slowdown in commerce spend as well. But I do think Shopify is unique because it's small and medium sized businesses. And we know those businesses without some of the balance sheets that these large cap companies have. They have struggled more these past few years of the pandemic just because of the environment. What does this tell you about the state of business in America. Yeah, I think it tells you that it's not great. Right? I mean you you laid out the point perfectly, Shopify is more geared towards small and midsize businesses, right? So you know what we expect to hear tomorrow um is kind of what the state is on some of these small and midsize businesses, what are bankruptcies looking like potentially or kind of, you know, some of these startup companies, how are they kind of navigating the current, the current environment um as well as kind of, you know what what is kind of what, you know, what is it looking like at least from a volume perspective as we kind of go into the second half of the year. And I think overall I think it's gonna be difficult to really kind of break down exactly what percentage of it is really macro related versus what percentage of this is kind of, you know the shift from um you know the the the e commerce side of things to brick and mortar, but at the end of the day, I do think this is more macro related, I think some of the inflationary pressures that are out there um really, what's going on at the low end consumer side of things is definitely going to impact um you know, Shopify a lot more than potentially other companies out there. Is there any saving grace for this company? I couldn't even believe it, Angelo, I mean I know other companies are in the same boat but an 82% drop from its high in mid november of last year. That is stunning and below its actual low, at the start of the pandemic, do you think there's hope that the stock at least the company can turn it around? Listen, I when I think about Shopify and I look at the business model here, I actually do like the company a lot. We've had a hold recommendation on the company this entire time and you know, our fear is, I mean especially when you start thinking about a Shopify versus let's say a company like an apple apple kind of being the ultimate compound er out there, right, They generate a significant amount of free cash flow, they return it to their shareholders, They continue to grow the company from the top line and kind of a modest 4-6 pace percentage pace when you think about what Shopify has done here over the last couple of years, essentially they've been kind of aggressively spending um and and trying to grow the company at any price, right, sacrificing all profits and typically, you know, that that works out until you kind of hit a rough, rough, rough patch in the economy, which is what we're hitting right now. So, you know, they've essentially kind of utilized all the potential profits that they could have, um, you know, saved and they spent it and now they're kind of kind of paying the piper here. So um is there any hope for this company? I do think there is, but there's just going to be a lot of heartache, you know, coming, you know, at the, at the face of kind of Shopify in their shareholders here over the next couple of quarters, I'd expect kind of the stock to trade more range bound here after the 80% plus decline that we've seen this year. But nonetheless, I do, I do like the business model. I do think e commerce trends remain in a secular bull market, but I think this is a point in time where you just don't want to be near the start. What is your prediction, Angelo, when it comes to back to school spending and looking ahead to holiday spending as well? We did get the consumer confidence numbers this morning disappointing on a decline now for the third straight month, do you think the consumer will have the confidence to go out and spend amid this back to school season and eventually the holiday period too? I think it depends on the consumer, right? I mean, I think it depends on who we're talking about. We're talking about the high end consumer, we're talking about the low end consumer right? Um, and I think Apple later this week is going to kind of hint potentially what the state of the high end consumer is going to look like. And I actually think their positions pretty well. So at the end of the day, I think we still have a fairly, okay holiday selling season, it's going to be driven by the high end consumer out there while you know, the low end consumer continues to face its issues. But this is definitely a bifurcated market, to be sure. Um, okay, Angelo Zino, we got to leave it there. Angelos, senior equity analyst at c f R. A Research. Thank you.