Shopify logo hangs behind the Canadian flag after the company's IPO at the New York Stock Exchange on May 21, 2015. Betting on the company's current fortunes has become more complex.Lucas Jackson/Reuters
Investors with big hopes pinned to Shopify Inc. have endured a bittersweet start to the year – underscoring the opportunity in buying beaten-up stocks with strong growth potential, but also the treacherous environment for the technology sector amid shifting views on inflation and interest rates.
Consider these two very different performance metrics.
First, at its 2023 high point on Wednesday, Shopify’s SHOP-T share price was up an impressive 52 per cent in 2023, making it a top performer within the S&P/TSX Composite Index as the stock rebounded from last year’s lows.
Second, after Shopify reported its latest quarterly financial results on Wednesday evening, the stock fell 15.5 per cent on Thursday, making it a key drag on the index and extending a volatile ride that has defined the stock for much of the past year.
Which performance metric is likely to persist?
Bullish investors no doubt are hoping for a clearer view of the company’s growth potential as an e-commerce giant that offers the software and ancillary services for small and medium-sized businesses to sell online.
But perhaps what these investors need, more than anything, is for the bond market to play nice again with fast-growing – but unprofitable – tech stocks.
Shopify’s fourth-quarter financial results were hardly disastrous, leaving many analysts struggling to explain the freefall.
Revenue rose 25.7 per cent from the same period last year, slightly ahead of analysts’ expectations.
Gross merchandise volume, or the sales across all Shopify customers, rose 12.8 per cent. That’s well ahead of U.S. retail sales growth and bolsters the reason why analysts are generally upbeat about Shopify’s long-term prospects.
Sure, there were a couple of disappointments. Shopify reported a wider quarterly loss of 49 U.S. cents per share during the quarter, but this is a company that is not normally valued on profit.
The company was also vague about the outlook for the first quarter, forecasting that revenue growth should be in the high-teens rather than the 20-per-cent growth that investors may have been looking for. But, again, should that induce a run for the exits that wiped more than $13-billion from Shopify’s market value in a single day of trading?
Perhaps investors should take a closer look at what has been sucking the life out of technology stocks for much of the past year: bond yields.
When bond yields were ultralow during the worst of the pandemic, tech stocks shone. There was little competition for investor interest from fixed income. And investors were okay with the promises of far-away profits.
But nothing better explains the downturn in tech stocks in 2022 than rising bond yields, as central banks confronted surging inflation with aggressive rate hikes.
The yield on the 10-year U.S. Treasury bond soared to a high above 4.3 per cent in October from about 1.5 per cent at the start of 2022.
Suddenly, even cash looked like a viable alternative to stocks. The tech-heavy Nasdaq Composite Index fell 30 per cent during this period. Shopify was beaten up even more, falling 78 per cent.
Further entrenching the relationship between bond yields and tech stocks, the Nasdaq rebounded by about 17 per cent in the first five weeks of 2023, and Shopify rallied even more, as bond yields retreated with the prevailing view that central banks were just about done with rate hikes as inflation subsided.
But Shopify’s troubles this week follow yet another surprise swing in the bond market.
The yield on the 10-year U.S. Treasury bond briefly rose above 3.9 per cent early Friday, notching a three-month high and up from about 3.4 per cent at the start of the month, amid stubborn inflation and stronger-than-expected economic activity.
Some observers are warning that the upswing in bond yields could undermine parts of the stock market.
“The tech sector, with its high growth rates, is particularly sensitive to rates and so we expect these recent gains to be transitory,” Gargi Chaudhuri, head of iShares Investment Strategy Americas, said in a note this week.
A bet on Shopify, then, is complex.
Investors have to count on the company generating strong revenue growth and navigating the competitive threat from the likes of Amazon.com Inc. AMZN-Q But investors also need to hope for a turn in the bond market while the economy keeps chugging along.
As this week showed, getting it wrong can be painful.
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