Shopify Q3 2022 Earnings: Bigger, More Unprofitable, and Chasing Amazon

I listen to earnings calls to learn about management, strategy, and execution, not as much about estimates and expectations. Analysts loved what they saw today. I see more than a few dark clouds.

Here are the big themes:

1 - Shopify operating margin drops from flat y/y in 2021, to now -25%.

What does it mean? Everytime Shopify spends $1, it loses $1.25.

While there are a lot of SaaS companies look like this, it's not a good look. And Shopify has not had such terrible net operating margins since before 2018 when I clocked it at -20%.

2 - Where did those expenses come from? (I have to imagine a lot of this is Deliverr)

* Research & Development spending increased 86% y/y. Almost double!

* General & Administrative spending increased 62% y/y. Literally this is overhead.

* Sales & marketing spending increased 27%

Keep in mind top-line revenues only increased 22% year over year and gross margins went down from 54% to 48%. So less profitable per item you sell, and you increased expenses 3-4x the rate of your revenue growth. Not the formula for entering economic uncertainty.

Hard not to predict a major restructuring coming as they integrate Deliverr. Clearly these trends cannot continue indefinitely.

3 - Shop Promise aimed at the heart of Amazon.

SFN merchants now have Shop Promise (no word on Deliverr yet).

I looked at a Shop Promise badge in the wild (link below) and even the core value prop screams "you get fast 2-day shipping without a subscription"... meaning Prime.

It couldn't be more on the nose. So we have Shop Promise in one corner and Buy With Prime in the other.

4 - Subscription growth slows.

12% year over year growth. Subscription revenue growth had been like 45%.

They say this is because of app store revenue changes. Now they tell us app store revenue was in subscription revenue?

Doesn't this mean BigCommerce is growing subscription revenue faster? (Like 3x faster? I have them at like 35% y/y subscription growth)

5 - Tobi should probably stop answering questions on earnings calls. My favorite quote today:

"Wherever we become active, it's an area we can make significant conceptual simplifications improvements to our customer's businesses"

🤷♀️

This feels like a good place to stop.