Shopify Shares Down By 14% After Laying Off 10% of Their Employees

Shopify suffered a major blow as shares of the company dipped by 14% on Tuesday. 📉

Earlier that day, Shopify founder and CEO Tobi Lütke sent a heartfelt memo to the company about the immediate changes regarding their personnel.

“Shopify has to go through a reduction in workforce that will see about 10% leave by the end of the day,” Lutke wrote.

⚠️ The company’s global workforce of more than 10,000 will now be downsized to around 9,000, as most of their staff with hiring, support, and sales functions will be let go. Those found to have redundant and extremely specialized roles and teams that had functions not closely related to product development but were still previously helpful for the company – will also be laid off.

A Costly Miscalculation

Lütke admitted that he made the wrong bet regarding Shopify’s manpower expansion.

In the same memo, he explained that based on the available data before the pandemic started, they made a bet that the ecommerce boom would persist and the money going to e-commerce than traditional retail stores would surely shoot up by 5 or 10 years.

To match their forecasted exponential growth, they expanded and hired more employees. But now, the data shows otherwise.

The line graph on his memo shows the growth of e-commerce adoption descending to “where pre-Covid data would have suggested it should be at this point.”

“Ultimately, placing this bet was my call to make and I got this wrong,” he wrote.

The New Reality

The Canadian ecommerce company joins the 140+ American tech companies who have collectively laid off more than 30,000 of their employees so far this year.

Tech – which is one of the industries that emerged as a winner during the pandemic – is now one of the hardest hit sectors of 2022.

The continuous lockdowns during the first two years of the pandemic plus the health scare caused by a novel virus forced consumers to conduct their day-to-day activities within the confines of their own homes.

The demand for tech products like laptops and tablets used for online schooling and remote work, and services like live streaming and online shopping skyrocketed, prompting the tech companies to rapidly expand to cope up with their anticipated, long-lasting growth. As a result, the stock prices of these tech companies also ballooned.

That explosive growth is now showing signs of decline as the world is transitioning back to face-to-face classes and work. Travel restrictions are being lifted and consumers are allowed to shop in malls again.

LinkedIn’s principal economist Guy Berger shared his observation with Yahoo Finance last week.

“Tech just kept hiring and rising and rising at least through the end of last year. Now [tech] is coming down much faster. It’s almost like a boomerang in that it went up faster and is coming down more sharply.”

As Infrastructure Capital Management CEO Jay Hatfield points out, “It’s a liquidity and pandemic-driven bubble.”

The layoffs happening across the sector seem to show that the companies that enjoyed initial success early on in the pandemic (and quickly expanded as a response to that) may have overestimated the duration of that success, not to mention their ability to sustain their growth.

Now, there is a need for them to recalibrate as the new reality continues to evolve.

Reasons for the Layoffs

The spike in layoffs during the mid-year may have something to do with the tech companies wanting to sort out their plans and resources before Q3 ends. 🤔

The high-risk stocks of these tech giants have also been battered by significant macroeconomic factors such as the incessant lockdowns in China, Russian invasion of Ukraine, Federal Reserve’s doubling of interest rates, record-high inflation, and fears of a recession.

In addition, some tech companies also cited the current macroeconomic environment and their goal to prudently manage their expenses are the reasons why they are trimming down their workforce.

In the case of Shopify, their recent $2.1B acquisition of Deliverr – an eCommerce fulfillment company – may be another reason behind the layoff. It is likely that the company is downsizing to reshuffle their resources towards their fulfillment network so they can compete better with Amazon’s Buy With Prime.

In all fairness to Shopify, they are not the only company to miscalculate and overestimate their projections regarding the e-commerce boom during the pandemic.

eCommerce giant Amazon made the same bet (and mistake) when it increased its employees to 1.7 million, only to lower it to 1.6 million in the next quarter.

Amazon stock prices also dropped by 10% after the company reported a $3.8 billion net loss – its first loss since 2015 – in April this year. Amazon CEO Andy Jassy shared the loss is attributed to the pandemic and ongoing war in Ukraine, though how that latter could be is unclear.

There’s no way to fully predict what will happen next in the tech sector, but one thing’s for sure: these companies need to remain agile and strategic if they want to withstand and overcome these inflationary economic shifts. 💪