Shopify Management Growing Pains Revealing Fault Lines

Shopify Q2 Earnings Call shows a few positives, but it also reveals tremendous challenges in a management team in unfamiliar territory.

A few positives before I jump in:

* Off-Shopify GMV is impressive, and frankly a lifeline. Their POS is nothing to write home about, but it's fine. And without it you would likely be seeing at least twice the layoffs right now.

* Shopify eCommerce GMV is still growing faster than industry.

Let me explain this simply in a fun way.

The underpants gnomes on South Park had a simple get rich scheme.

1 - Steal underpants.

2 - ?

3 - Profit.

When I listen to Amy, Harley, and Tobi's answers to straightforward analyst questions, I feel Shopify's plan is similar:

1 - Add a bunch of features.

2 - ?

3 - Growth. (I would say profit, but they have not truly proven that yet)

While many large companies have been caught up in a whipsaw in the past few years, Peloton: supply chain and people, Amazon's: overbuilt fulfillment network, Target and Walmart: inventory, Shopify overhired and yesterday announced 10% cuts.

I came out of the call and reading earnings with a few thoughts and comments:

* 10% cuts will not be enough. I predict they will need to get to 20-25%. This is a big strategic mistake on Shopify's part because you want to cut once and deep, rather than dribble it out.

* If Shopify has a Corporate PR team, they should fire them. "Oops" is not a communication strategy. Be more introspective. Tell us what management planning exercise led to the change. Or don't say anything. Employees don't appreciate being the scapegoat for management missteps, and with financial analysts you just look incompetent with the graph released. A graph is not a strategy.

Why did you overhire due to GMV growth increase? Is it because of incapable servers? Is it because your cost to serve is too high? Tell us and what is the plan to fix it. Some serious "5 why" soul searching is warranted.

* Tobi literally said in response to a layoff / management philosophy question "we didn't come at layoffs from a financial perspective."

Revealing there is no underlying management philosophy here. If that's the case, why now? is the obvious counter-question to that.

But you know that's not the real answer.

* Shopify was asked if their merchant GMV was discretionary or non-discretionary?

Non-answers about category growth. Useless without same-store-sales data. If you want my opinion, Shopify merchants are overwhelmingly discretionary. This matters because of recent Labor / Guggenheim and other data showing inflation is greatly squeezing discretionary spending.

My take: Shopify GMV growth has more headwinds than they are letting on. New merchants will have to power this year, more so than existing.

* Lost $1B in unrealized value from investments in 2Q alone. $2B so far this year.

My take: Please Shopify stop investing on your balance sheet!

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