KEY POINTS

  • Shopify and other growth stocks took a hit due to the Federal Reserve’s latest rate increase.
  • The e-commerce company’s shares have already taken a sharp hit as investors worry about its slowing growth and high valuation.

What’s going on with Shopify stock

Shopify stock was crashing yesterday, along with other top losers of the session. The Federal Reserve’s 75-basis-point increase to the benchmark federal funds rate on Wednesday and comments about future interest rate hikes drove shares of the e-commerce software firm lower.

Although Shopify (NYSE:SHOP) had no company-specific news on Thursday, the stock went down 6.5% to a new 52-week low due to concerns about potential recession and tightening monetary policy.

Why we care

Shopify, like most e-commerce businesses, has taken a beating this year. This is owing to investors’ growing worries that a recession is impending and the growth comparisons it faces against 2021. That was when COVID-19 was still causing large numbers of consumers to avoid brick-and-mortar stores.

Shopify is a growth stock that has been largely unprofitable throughout its history. As a result, it is particularly susceptible to higher interest rates. Economists anticipate interest rates to cool down economic growth. Furthermore, it will make future earnings less valuable by raising the discount rate in financial models. Even if a more robust US economy hurts it, Federal Reserve Chair Jerome Powell says he will raise rates to rein in inflation. That’s a stern warning for companies like Shopify that rely heavily on the consumer discretionary sector. The majority of Shopify’s clients’ purchases are non-essential.

What now

Much of Shopify’s history includes enormous growth numbers, and it was one of the market’s most significant gainers before 2022. However, now that has changed.

Thursday’s slide was only the latest in bad news for the company. This year, stock prices have tanked due to slowing revenue growth, competition from Amazon‘s (NASDAQ:AMZN) new Buy with Prime program, and most recently, the loss of two top executives. As a result, many investors doubt that the company can pick up its revenue growth again, even without a recession throwing more hurdles.

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

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