Shares of Shopify Inc. were under pressure in Tuesday trading after the e-commerce giant reported quarterly results and cost projections that spooked investors, but analysts say the company is still headed in the right direction.

Ottawa-based Shopify saw its revenue rise 24 per cent to US$2.1 billion in the final quarter of 2023, beating the average estimate of $2.08 billion in Bloomberg’s analyst survey, while profit also beat expectations.

“The quarter itself was great,” Samad Samana, an analyst with Jefferies Group, told BNN Bloomberg in a Tuesday television interview.

“They beat on gross merchandise value (GMV), they beat on total revenue and they continue to deliver better profitability.”

But the company also said Tuesday that operating expenses, driven mainly by marketing and employee compensation costs, will increase by more than 10 per cent in the first quarter of this year.

Analysts expected expenses to rise by less than two per cent during that time, according to Bloomberg data.

Tyler Radke, director and senior equity research analyst at Citi, says that despite the earnings beat, many investors were hoping for even better, and the company’s higher-than-expected expense outlook will impact profitability going forward.

“You add that all up together, it just missed the bar. It’s still a very well-run company, they're growing very nicely, but we just think investors were expecting a bit more,” he told BNN Bloomberg in a Tuesday interview.

History of conservative projections

Radke and Samana both noted that Shopify has over-delivered on profitability in the past by keeping projections conservative, which could lead to another profit and revenue beat when the company next reports earnings. 

“When you think about the forward expectations, you almost can't judge them for not being perfect there because they have this pattern of being conservative,” Samana said.  

“So they're almost setting us up for another round of better-than-expected results.”

Samana added that Shopify can afford to shift some of its capital to investments in places like marketing and the development of new tech such as AI, given its large share of the e-commerce market.

“If you think about the investments that they're making, it's on acquiring new customers, and these investments have a good payback period,” he said.

“From a market share perspective, now is the time when it makes sense to invest, while you have a very new important theme in investing in AI – they can't be left behind.”

Valuation concerns

Shopify shares fell as much as 13 per cent on Tuesday following the earnings release after a months-long run up that saw the stock more than double last year.

Radke said the company’s high valuation relative to other companies in the e-commerce space partly explains Tuesday's selloff.

“A lot of times valuation seemingly doesn't matter, but then when you get these quarters where there are these slight expectation misses, that can trigger a pretty violent or severe share price reaction,” he said.

“It's possible this could be a buying opportunity... it’s still a really well-run company, but it comes down to what are you willing to pay for this stock, where the multiple is still at one of the highest in all of software.”

With files from Bloomberg News