Shopify (TSX:SHOP)(NYSE:SHOP) stock is taking a beating this year. Down 46% year to date, it is having an absolutely brutal run. Prior to this year, SHOP stock had been delivering a compound annual (CAGR) return of nearly 100%. Reliably beating the market year in and year out, it was a true TSX darling. This year, that run came to an abrupt end — or, perhaps, a brief interruption.
In late November, the entire tech sector entered a prolonged selloff that it still hasn’t recovered from. SHOP, as a tech stock with above-average volatility, predictably fell more than the average tech stock. Initially, there wasn’t much material to SHOP that could explain this. It appeared it was just moving in tandem with its sector. Later, though, SHOP delivered an earnings release that perhaps wasn’t mind-bogglingly great.
Revenue and adjusted EPS beat, but investors zeroed in on an on-paper loss in GAAP earnings caused by a decline in Shopify’s stock portfolio. In my estimation, the market’s reaction to the earnings release was excessive, but today’s macro climate has led to an environment where any earnings ambiguity from tech companies is treated as an apocalyptic loss.
Interest rates rising
As most readers will know, we are in a rising interest rate environment at the moment. This means that growth stocks are becoming less valuable based on previous growth assumptions. Any increase in interest rates reduces the present value of a series of cash flows. The higher the growth rate in the cash flows, the more severe the percentage reduction in value. A growing cash flow is always worth more than a flat one, but stocks are priced with growth assumptions in mind. Therefore, if investors are being rational, high growth stocks will decline in value more than low growth stocks when rates rise.
This is bad news for a company like Shopify. Its revenue growth was 41% in its most recent quarter, and its adjusted earnings growth has mostly been strong as well. Earnings did decline in Q4, thanks to increased investments and mark-to-market losses. But Shopify is, over the long term, a strong grower that trades at high multiples due to its strong growth. Thanks to higher interest rates, the higher multiples are harder to justify. So, SHOP is perceived as less valuable today.
Last quarter mixed
Another factor that may be causing SHOP to sell off is mixed earnings in the most recent quarter. In the fourth quarter, SHOP delivered the following:
- $1.38 billion million in revenue, up 41%
- A $2.95-per-share GAAP loss
- $1.38 in GAAP EPS, down 15%
Revenue and adjusted EPS both beat expectations. However, the massive GAAP net loss was unexpected. Shopify holds a publicly traded stock portfolio, and it declined in value due to the Q4/Q1 tech stock crash. Apparently, it declined more than analysts were expecting, as SHOP solid off nearly 20% the day after the release. The adjusted earnings also weren’t so pretty. They did beat expectations, but they declined from the prior year, which probably didn’t look appealing next to the colossal on-paper GAAP loss.
