Shopify’s bad bet

There were few companies in the world better positioned for the pandemic than Shopify. Small businesses whose storefronts were shuttered turned to the company with haste to find shoppers online.

But that left Shopify's leadership with a tricky calculation: Was the surge in ecommerce demand a wave to ride out or a sign of a long-term change in how people shop? The company bet that shopping had changed for good and, as its leaders now admit, got it wrong.

"In short, we overshot our prediction," president Harley Finkelstein said Wednesday on the company's second-quarter earnings call. Shopify reported a net loss of $1.2 billion, compared to a $876 million profit in the second quarter of 2021. The company is projecting losses for the second half of the year as well.

• Shopify's share price actually traded up about 12% following the report. But most of the damage was done Tuesday, when Shopify announced it was cutting 10% of its staff in response to the changing market. Its share price plunged 14% on the day and, even with Wednesday's boost, is down about 75% on the year.
• Shopify's revenue grew 16% year-over-year, to $1.3 billion. For the same period in 2021, Shopify saw 57% annual revenue growth.
• Meanwhile, the firm's operating expenses jumped 76% to $846 million, as the company said in its earnings release that it boosted hiring across research, sales and marketing and bought more ads in international markets.

Shopify is "recalibrating" its spending. That recalibration seems especially focused on head count.

• Shopify grew from about 5,000 employees in December 2019 to over 10,000 by the end of 2021, according to its annual investor filings.
• CEO Tobi Lütke wrote in a blog post Tuesday that the rapid hiring was a bet that the speed at which consumers favored online shopping would "permanently leap ahead by 5 or even 10 years" because of the pandemic. Shopify needed to staff up to meet that demand.
• "It’s now clear that bet didn’t pay off," Lütke wrote. "What we see now is the mix reverting to roughly where pre-COVID data would have suggested it should be at this point." In response, the company cut 1,000 jobs.

But Shopify's bets were not limited to hiring. Most notably, the firm paid $2.1 billion this year to acquire Deliverr, an order-fulfillment technology company.

• Amy Shapero, Shopify's chief financial officer, told analysts that the company was not adjusting its planned investments in Deliverr or its Shopify Fulfillment Network. That includes $200 million in total capital expenditures this year.
• The fulfillment network is Shopify's latest gambit for competing with Amazon, placing warehouses across the country to allow more of its merchants to offer two-day shipping. But some of its small business customers have said they’d prefer the firm focus its energies on software that helps boost overall sales.
• That could become all the more urgent as Shopify projects the economy making things hard on its merchants. "We anticipate that inflation and the continued softness in consumer spending on goods will persist through the remainder of the year," Shapero said. To that point, Etsy reported on Wednesday that its gross merchandise sales fell slightly in the second quarter, though the firm made up for it by hiking transaction fees to still beat revenue projections.

That final point has implications for any fintech with exposure to consumer spending. Consumer confidence is still falling, even if it’s still well above the depths of the Great Recession. And Wall Street investors are already turning against "buy now, pay later” firms and fintech lenders, which were better positioned when interest rates were at rock bottom and consumers wanted to spend. Plenty of public fintechs will have to show their cards as they report second-quarter earnings in the coming weeks. Shopify's executives might not be alone in questioning their bets.

— Ryan Deffenbaugh (email | twitter)

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On the money

FTX.US opens stock trading. As expected, the crypto exchange has added the option to trade stocks. Outside the U.S., FTX already offers tokenized stocks.

Bitcoin rises after rate hike. While bitcoin’s utility as a hedge against inflation remains cloudy, bitcoin was up about 8% Wednesday, as the Fed raised its benchmark interest rate by three-quarters of a percentage point.

Cathie Wood offloads Coinbase. The investor’s closely watched ARK Invest asset management firm sold more than 1 million shares of Coinbase Tuesday, following a report the company was under SEC investigation. Wood reportedly scooped up about $50 million worth of Shopify shares following its price dip on Tuesday.

Another fintech shopper emerges. The CEO of Lloyds Banking Group said the firm could buy more financial technology companies to bolster its digital offerings. The CEO of Capital One said last week that the company was considering fintech acquisitions as well.

Web3, IRL. Solana is opening a store in Manhattan’s Hudson Yards that includes an NFT gallery wall.

Durbin strikes again

Sens. Dick Durbin and Roger Marshall will propose a bill as early as this week targeting credit card fees, The Wall Street Journal reports. The proposed legislation would be similar to the 2011 Durbin amendment, which capped fees debit card processing companies could charge.

According to the sources that spoke to the Journal, the bill would permit merchants to transact through different networks beyond Visa and Mastercard, a duopoly that controls most of the credit card market. Currently, when a customer uses one of the two companies’ cards, the payment must be processed through the corresponding branded network, which critics say allows the companies to charge high fees without much competition.

In a Senate Judiciary Committee hearing in May, credit card executives said the industry faces increased competition from digital wallets, "buy now, pay later" providers and cryptocurrency. “Regulatory interventions focused exclusively on card networks would shift consumer spending away from networks like Visa, and toward more expensive payment methods with more risk, less reliability and fewer protections and security,” Bill Sheedy, senior adviser to Visa CEO Al Kelly, said at the time.

Read the full story on Protocol.com.

Moves and hires

CFTC Commissioner Goldsmith Romero hired Joseph Cisewski as her chief of staff and senior counsel.Cisweski most recently served as general counsel for Pantera Capital.

Will Ruben has joined Uniswap as its vice president of product. Ruben was formerly senior director of product management at Coinbase.

LendingClub has named Drew LaBenne as chief financial officer. LaBenne, previously CFO of Bakkt, will take over the role in September for the retiring Tom Casey.

The Crypto Council for Innovation named two new executives. Linda Jeng has joined as a chief global regulatory officer and general counsel. Jeng is a former senior aide to the Federal Reserve Board. Brett Quick has joined the crypto council as head of government affairs for North America. Quick's Capitol Hill experience includes time as a staff director of the Senate Banking Committee’s national security subcommittee.

U.K.-based banking app and card provider Curve has hired Eyal Galina as chief product officer. The company has been working to build a foothold in the U.S.

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