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Shopify Stock Drops 14%; CEO Admits Being Wrong

Story Highlights

Shopify has to correct course after CEO Tobi Lütke’s outlook on the e-commerce market turned out to be too optimistic. While there is a cost to bear because of this wrong prediction, the long-term benefit should outweigh the current sacrifice.

Shopify (SHOP) (TSE:SHOP) CEO Tobi Lütke has admitted that his projection of the expansion of the e-commerce business was inaccurate. As part of an attempt to adjust to the reality of the market, Shopify is laying off some employees. SHOP stock fell more than 14% to $31.55 on July 26. The stock has dropped almost 80% year-to-date.

Founded in 2006 and based in Canada, Shopify helps businesses to set up and run online shops. Apart from providing businesses with online selling tools, Shopify also helps them with order deliveries. Shopify charges merchants a monthly fee to access its solutions.

Shopify CEO Got Too Optimistic With His E-Commerce Growth Predictions

After the COVID-19 pandemic hit and authorities restricted people’s movement, many consumers turned to shop online. As a result, many retailers shifted their businesses online to better follow the customers. The shift boosted demand for Shopify’s solutions. 

In trying to gauge where the market was going and prepare for the future, Shopify CEO Lütke predicted that online retail spending would permanently jump ahead by five to 10 years. In turn, he steered the company to a hiring spree that grew the workforce rapidly in anticipation of strong future demand. However, Lütke’s growth prediction turned out to be too optimistic and he has admitted that his call was incorrect.

10% of the Workforce to Go

As the CEO bets on accelerated growth, Shopify’s headcount grew to 10,000 people at the end of 2021, from 7,000 people at the end of 2020. However, the company now plans to cut 10% of its workforce.

Shopify is cutting jobs across the board, with a focus on removing duplicate or over-specialized roles. However, the layoffs will most heavily impact recruiting, support, and sales teams. The company is offering severance pay that covers 16 weeks for the impacted employees. 

The affected people will also receive an additional week of pay for every year of service at Shopify.

Wall Street Is Cautiously Optimistic About SHOP Stock

On July 26, Citigroup analyst Tyler Radke reiterated a Hold rating on Shopify stock but lowered the price target to $37 from $43.20. Radke’s reduced price target indicates 17% upside potential.

The rest of the Street is cautiously optimistic about the SHOP stock with a Moderate Buy consensus rating, based on 13 Buys, 14 Holds, and two Sells. The average Shopify price target of $70.48 implies 123% upside potential to current levels. 

Best-Performing TipRanks Portfolios Buying More Shopify Shares

TipRanks’ Stock Investors tool shows that investor sentiment is currently Positive on Shopify, with 3.6% of the best-performing portfolios tracked by TipRanks increasing their exposure to SHOP stock over the past 30 days.

Final Thoughts

The adjustment that Shopify has decided to make after the CEO’s wrong growth prediction will cost the company in the short term because of the severance payments. However, this step should put Shopify in a better position to operate more efficiently in the future.

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