Shopify’s fulfillment network is ‘negative drag on profitability’ - Morgan Stanley

Sep. 20, 2022 10:10 AM ETShopify Inc. (SHOP), SHOP:CAAMZNBy: Kevin P. Curran, SA News Editor49 Comments

Shopify Germany

Sean Gallup

Shopify (NYSE:SHOP) has an increasingly difficult path to profitability as it pursues fulfillment capabilities, according to Morgan Stanley.

The potential to compete with Amazon (AMZN) in fulfillment “remains top of mind for investors”, equity analyst Keith Weiss wrote in a note on Tuesday. However, he indicated that the costs of establishing this network are overshadowing the potential at this point

“Our analysis finds that building out Fulfillment is likely just the beginning of a multi-billion dollar investment cycle with a difficult path to significant operating profitability,” Weiss said. “Rather than an accretive contributor to Shopify’s earnings power, this dynamic more likely represents the growing competition across Amazon and Shopify offerings as the two platforms’ business models increasingly collide.”

Given the anticipated investment cycle, Weiss lowered his margin and operating income estimates. That bottom line impact more than counteracts a projected positive top-line impact, in his view.

“Fulfillment is likely to be a negative drag on profitability and we struggle to see how Shopify can inflect operating margins to be profitable longer-term,” he concluded.

Weiss cut his price target on the stock to $40 from $44 as a result of the changes in his model while reiterating a Hold-equivalent rating.

Read more on Shopify’s new employee compensation structure.

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