Why Shopify Stock Dived 17% Last Week

The ongoing correction in tech stocks like Shopify could create an opportunity for long-term growth investors to buy cheap.

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What happened?

The shares of Shopify (TSX:SHOP)(NYSE:SHOP) tanked by 17% last week to $1,446 per share, starting the new year on a bearish note. With this, SHOP stock has erased more than 25% of its value in the last 25 sessions against a 2.1% rise in the TSX Composite Index during the same period.

So what?

Last week, there was no company-specific news that could be blamed for a massive drop in SHOP stock. In fact, these losses are mainly a result of a recent big selloff in the technology sector across North America. That’s one of the reasons why its home market peers like Lightspeed and Nuvei have also seen a big correction in the last couple of weeks.

The ongoing tech sector-wide correction has mainly affected stocks with high valuation multiples, including Shopify. This is the reason why SHOP stock ended 2021 with only 21.2% positive returns — its worst yearly performance since it went public in 2015. Previously in 2019 and 2020, the e-commerce giant’s accelerating financial growth drove a massive rally in the stock. Notably, it rose by about 174% in 2019, and it posted even slightly higher 178% gains in 2020.

Investors’ continued speculations about the tightening monetary policy in the United States intensified the recent drop in high-flying tech stocks — especially after the release of the latest FOMC meeting minutes on Wednesday last week. These external negative factors seemingly prompted investors to book profits amid their fears about a possible sharper correction in the tech sector later this year, taking the SHOP stock price lower.

Now what?

After reporting a 47% year-over-year rise in its total revenue in 2019, the pandemic-driven demand and favourable business environment for its services gave a big push to Shopify’s sales growth in 2020. As a result, its total revenue in 2020 jumped by 86% from a year ago to US$2.9 billion.

While the company is yet to release its Q4 2021 results, Street analysts expect its revenue growth rate for full-year 2021 to be around 56%. This expectation shows a sharp drop in its sales growth in the last year. But it shouldn’t be surprising for its investors, as Shopify’s management was already expecting this slowdown in the post-pandemic world. Also, a more than 50% year-over-year increase in top-line still reflects a solid growth trend for a tech company, which is much higher than most other companies. That’s one reason why the ongoing correction in the tech stocks like Shopify could create an opportunity for long-term growth investors to buy it 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 Nuvei Corporation and Shopify. The Motley Fool recommends Lightspeed Commerce. Fool contributor Jitendra Parashar has no position in any of the stocks mentioned.

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