Why Shopify Stock Was Getting Dumped Today

What happened

Shopify (SHOP -6.48%) stock was amongst the massive losers of the session on Thursday. Shares of the e-commerce software company fell in response to the Federal Reserve’s 75-basis-point hike to the benchmark federal funds rate Wednesday, in addition to commentary about future rate of interest hikes.

Though there was no company-specific news out on Shopify Thursday, tightening monetary policy and concerns a couple of potential recession were enough to drive the stock down 6.5% to a latest 52-week low.

So what

Like most e-commerce stocks, Shopify has been hit hard this 12 months, each on account of investors’ intensifying concerns that a recession is coming and the difficult growth comparisons it faces against 2021, when COVID-19 was still causing large numbers of consumers to avoid brick-and-mortar retailers.

As a growth stock that has been mostly unprofitable over its history, Shopify can be particularly vulnerable to rising rates of interest, that are expected to chill off economic growth and make its future earnings less precious by increasing the discount rate in financial models. Fed Chair Jerome Powell said Wednesday that the central bank would proceed to lift rates to bring inflation under control, even when that hurts the economy. That is a transparent warning for corporations like Shopify which are heavily exposed to the patron discretionary sector. A lot of the purchases from businesses that use Shopify’s platform are discretionary in nature. 

Now what

Shopify put up monster growth numbers for much of its history, and prior to 2022, it was considered one of the most important winners in the marketplace. But that is modified.

The corporate was already struggling before Thursday’s slide. The stock plunged this 12 months on account of slowing revenue growth, competition from Amazon‘s latest Buy with Prime program, and more recently, the lack of two top executives. Investors already seemed skeptical that the corporate would find a way to reaccelerate its revenue growth, and a recession would only present one other challenge.

While Shopify stock still looks like bet over the long run, its recovery may take longer than bulls hope.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Idiot’s board of directors. Jeremy Bowman has positions in Amazon and Shopify. The Motley Idiot has positions in and recommends Amazon and Shopify. The Motley Idiot recommends the next options: long January 2023 $1,140 calls on Shopify and short January 2023 $1,160 calls on Shopify. The Motley Idiot has a disclosure policy.

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