Shopify Inc. headquarters in Ottawa on May 3.Sean Kilpatrick/The Canadian Press
Big tech companies aren’t fading away, but investor expectations certainly are. That may be good news as former superstars lose their lustre.
This week, many household tech names delivered their latest quarterly financial results amid a worrisome climate of rising interest rates, slowing economic activity, declining consumer confidence and simmering geopolitical tensions.
These were all known threats that have been weighing on the stock market throughout most of 2022. Even with these factors taken as givens, tech companies still managed to produce a number of surprises that shocked, horrified and – in the case of Shopify Inc. SHOP-T – delighted investors.
The common thread here? While large tech stocks used to enjoy high valuations that reflected strong confidence in their sizzling growth, these valuations are falling back to earth as that confidence fizzles.
That can be demoralizing for long-term investors in companies that once looked impervious to disappointment. But as Shopify demonstrated this week, lower expectations can lead the way to rebounds.
First, let’s start with some of the biggest belly flops, where companies missed analyst estimates for key financial metrics.
Google parent Alphabet Inc. GOOG-NE reported quarterly revenue of US$69.1-billion, up 6.1 per cent from the same period last year. But the result wasn’t celebrated, partly because it marked slower growth and mostly because the performance figure was lower than the one analysts had pencilled in.
Alphabet’s share price fell 9.1 per cent Thursday, which is a jaw-dropping decline for the blue-chip stock.
Microsoft Corp. MSFT-Q reported that its third-quarter profits tumbled 14 per cent from last year, amid slowing computer sales and a stronger U.S. dollar. Analysts had been expecting the decline; the unpleasant surprise came in the form of a disappointing outlook for sales.
Microsoft shares fell 7.7 per cent Wednesday after reporting its results the previous evening.
And in the biggest dive of the week, Facebook parent Meta Platforms Inc. META-Q shares plunged 24.6 per cent Thursday, erasing about US$78-billion from the company’s market capitalization.
The surprise: Meta Platforms said its expenses next year will be between US$96-billion and US$101-billion – a shocking figure that suggests the social-media company is facing considerable challenges in its pursuit of a broader online experience it calls the metaverse.
Editor’s Note: Is Shopify sunk or just growing up?
If these three examples demonstrate how dashed expectations can hammer a stock, Shopify’s results showed that better-than-expected results can provide a lift, even if the results look less than stellar on the surface.
The company, which provides software and services to help businesses sell online, reported revenue of US$1.4-billion in the three months ended Sept. 30, up 22 per cent from last year.
While that might look like upbeat news, revenue growth in the same quarter last year was noticeably higher, at 46 per cent year-over-year – which means sales growth is slowing.
And in terms of net income, Shopify reported a loss of 12 cents US per share, down from a profit of US$9 per share last year.
However, the share price rallied 17.1 per cent Thursday, suggesting that investors were pleasantly surprised by the quarterly financial results.
Shopify’s advantage here: Expectations had already fallen to low levels as the share price swooned as much as 84 per cent over the past 11 months. The decline shrank the stock’s valuation and gave the share price plenty of potential to bounce if results exceeded expectations.
They did, on a couple of key metrics.
Analysts had been expecting a loss of 7 cents US per share for the quarter, after adjustments for issues such as employee severance and a real estate impairment charge. Shopify reported an adjusted loss of just 2 cents US per share.
As well, analysts had been expecting revenues of US$1.34-billion, according to FactSet, which Shopify cleared by about 4.5 per cent.
“Shopify’s growth rate continues to normalize towards more sustainable levels,” Todd Coupland, an analyst at CIBC World Markets, said in a note.
The stock is still down 78 per cent from its recent high and is back to trading at levels seen before the start of the pandemic. The decline implies that investors believe Shopify – like much of the tech sector – is facing a challenging future.
If low expectations are easier to beat, though, investors might find something to like in this recent bout of volatility.