Crypto News: The cover curse

Hi folks, it's Brad. Shopify Inc.'s market cap has plunged 73% since a certain business magazine hailed the company on its cover in December. So what's ailing the so-called "Everywhere Store?" But first…

Today's must-reads:

• An Apple supplier is facing a worker revolt at a locked-down Chinese factory
• The SEC is inquiring about Elon Musk's Twitter share purchases
• Ousted Zilingo chief, Ankiti Bose, is fighting to clear her name

There's a certain ignominy reserved for news magazines that commit the journalistic sin of bad timing. Like Time magazine, which named Jeff Bezos its Person of the Year in late 1999, right at the start of the dot-com bust. Or, the old BusinessWeek, which in 1979 proclaimed the "Death of Equities" a few years before stocks began a historic decades-long bull run. Or Wired, which declared in 2014 that the sharing economy had finally gotten "Americans to trust each other." (Um, not quite yet.)

To that undignified pantheon I would like to nominate one of my own articles: "How Shopify Outfoxed Amazon to Become the Everywhere Store," published on the cover of Bloomberg Businessweek on Dec. 22, 2021. The story explored the recent success of the e-commerce software company based in Ottawa, Canada, which furnishes entrepreneurs and offline retailers with the tools they need to build web stores and facilitate online transactions. It also profiled its idiosyncratic coder turned founder-chief executive, Tobi Lütke, who had relinquished Shopify's offices during the pandemic and ordered the entire company to work virtually, in perpetuity.

"After an almost two-year run that's turned the quiet enterprise-tech company into a global e-commerce power, Lütke has earned some creative license," I wrote. Shopify's market cap at the time was $177 billion.

The total market cap of SHOP today: $41 billion—below even its pre-pandemic value.

There are a few easy but incomplete explanations for Shopify's decline, and they're the same factors now plaguing other pandemic winners like Amazon.com Inc., EBay Inc., Etsy Inc. and Wayfair Inc. Online retail sales have flatlined over the past few months and may have even decreased on an annual basis, as consumers emerged from quarantine and ventured back into physical stores. The small and medium-sized business on which many of these sites depend have been especially hammered by the sour economic cocktail of high inflation and rising interest rates. And since the market downturn, skeptical investors are no longer focused solely on revenue growth but on the comfortable formula of profitability and margins.

Still, Shopify's decline has been steeper than that of its peers, and it's mired in some unique boardroom drama. At its June 7 annual meeting, shareholders will consider a proposal to furnish Lütke with extra voting rights, solidifying his control of the company. It's the kind of initiative that would have sailed through, back when lionized founder-CEOs like Lütke could do no wrong. But in a jarring departure, two major investor advisory firms have voiced opposition to the measure.

There are two issues weighing especially heavily on Shopify, both of which I explored in my story last year. The first is the question of fulfillment; Shopify helps merchants make online sales, but when it comes to storing and shipping their products, it either brokers deals with third-party warehouses and transportation companies or leaves the last mile entirely to the seller. When I asked Lütke about this, he admitted logistics "is a tough nut to crack for byte companies" and suggested Shopify would shy away from owning and operating Amazon-style warehouses.

But he's in a tricky position. Shopify merchants need help delivering parcels quickly and reliably. At the same time, investors tremble at the massive expense of operating fulfillment centers and delivering packages. Last month, the company said it was buying a fulfillment company called Deliverr Inc. for $2.1 billion, and merging its capabilities with a robotics company it had previously acquired, 6 River Systems. Shopify's stock is down 30% since news of the acquisition talks broke last month, far exceeding market-wide declines. Whatever it does, Shopify risks antagonizing either its customers or investors.

The second issue weighing on Shopify is the encroachment of its most fearsome competitor: Amazon. In my article, I wrote that after years of strategic indecision, Amazon was developing a Shopify-like service that it had internally dubbed "Project Santos," an effort to extend the company's tools to third-party merchants who want to sell on their own websites and not necessarily on Amazon itself. When I asked him about it, Lütke didn't seem worried: "If they knock it out of the park and make it super easy to start new businesses on it, then I'm like, I actually accomplished my mission," he said.

In April, Amazon unveiled the service, called Buy with Prime, currently available on an invite-only basis. It extends the familiar Prime brand to third-party websites and offers shipping through Amazon's logistics network—exactly the piece that Shopify's service is missing. It also threatens to supplant Shopify's popular payment tool, Shop Pay, and undercut one of the company's strengths in the eyes of Wall Street. "Buy with Prime is about the brand, and the price of that brand is Amazon Payments," wrote Ben Thompson in his daily newsletter, Stratechery.

Lütke would probably say that the size of the retail industry can accommodate many large players and leave plenty of room for his company to grow. Still, investors are clearly fearing the worst now that Amazon is coming for Shopify. And for the time being, it's likely to keep Shopify off any more magazine covers. —Brad Stone

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