Why Shopify Stock Tanked Over 10% Tuesday

Shopify stock continues to trade with lofty valuation multiples at the moment.

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What happened?

The shares of Shopify (TSX:SHOP)(NYSE:SHOP) dived by well more than 10% this afternoon to below $1,563 per share. With this, the largest Canadian company by market cap started 2022 with sharp losses. In 2021, SHOP stock posted 21.2% gains against the TSX Composite Index’s 21.7% advances.

So what?

Shopify has been one of the most popular tech stocks since its initial public offering in May 2015. Its outstanding financial growth trends, surging demand for its easy-to-use e-commerce offerings, and solid e-commerce industry outlook have popularized it among growth investors.

Although there was no key company-specific news to blame for today’s big selloff in SHOP stock, a tech-sector-wide pullback across North America drove its big losses. At the time of writing, the tech-heavy NASDAQ Composite benchmark was trading over 1.7% losses for the session.

Interestingly, Shopify has a price-to-earnings multiple close to 200 based on its earnings estimates for the next 12 months. And the ongoing correction seems to be affecting the tech stocks with high multiples the most.

Now what?

In the last three years, SHOP stock has delivered an outstanding over 840% positive returns to its investors. In 2021, several market experts warned investors of a possible big correction in high-flying tech stocks, as they started looking too expensive. While the ongoing selloff might look horrifying to many at first, such healthy corrections usually prevent the formation of a market bubble.

You shouldn’t be surprised to see the year 2022 begin with a big pullback in most popular tech stocks, as it already started in December. Shopify stock also lost 10.3% of its value in December 2021.

Shopify’s financial growth has slowed down a bit in the last couple of quarters. Although its long-term growth prospects still look strong — also much better than most of its peers — Shopify stock is clearly trading with lofty valuation multiples. That’s why the ongoing correction could give you an opportunity to buy some high-growth tech stocks cheap.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool owns and recommends Shopify. Fool contributor Jitendra Parashar has no position in any of the stocks mentioned.

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