August began with a slump. The Nasdaq Index slipped 8% in the first five days of the month after the United States July unemployment rate reached a three-year high of 4.3%. This data set off economic alerts, with Goldman Sachs economists increasing the probability of a recession in the United States in the next 12 months from 15% to 25%. As always, tech stocks were the first to react instead of respond.
Why did tech stocks nosedive in early August?
Fear is a stronger emotion than greed. While it takes months and years for the market to grow, it takes a few days for the market to fall. Investors who got first-hand experience of the 2009 recession know how it impacted the finances of big and small firms. Tech stocks were trading at a high valuation because of the artificial intelligence (AI) boom. Thus, they were quick to react to the fear of a recession.
Another major reason for the pullback was the appreciation of the Japanese Yen. The Bank of Japan broke its eight-year-long negative interest rate trend and hiked interest rates. This appreciated the value of the Yen against the dollar. A stronger Yen made Yen-denominated loans expensive for borrowers.
Many investors and hedge funds that took low-interest loans from Japan and invested in US stocks to generate high returns rushed to sell their stocks and cut their losses from further appreciation in the Yen. Long-term investors need not worry about such events as the fundamentals of tech stocks and secular demand are unaffected by them. Therefore, it is better to understand the company and reason for investing. Those who did bagged the opportunity and bought the stocks at the dip.
Why did this popular Canadian tech stock fall?
Popular Canadian tech stock Shopify (TSX: SHOP) got caught in the Nasdaq correction and fell 11.8% between August 1 and 6. The fear of a recession created a rush of “The bridge is falling” herd mentality.
Moreover, news that Amazon (NASDAQ: AMZN) reported disappointing earnings fueled fear further. However, this fear was overblown as Amazon’s second-quarter revenue fell short of estimates while its net earnings topped the estimates. The e-commerce-to-cloud company earns most of its revenue from e-commerce and most of its profit from the cloud business. Even though the revenue fell short of estimates, it grew 10% year-over-year in the second quarter. And Amazon’s stock price rally was primarily because of the AI opportunity for cloud services.
Value investors who were confident over the fundamentals bought the dip.
What’s going on with Shopify this month?
When Shopify released its second-quarter earnings on August 7, the stock jumped 17.9% in one day and recovered from the correction. This is because the company reported a net profit of US$171 million.
After the pandemic, Shopify shifted its focus to profitability. It offloaded its logistics business, which was pulling down its profits. The second quarter saw the end of the dilutive effect of the logistics business and a strong growth in profits from its payments business.
| Year | Shopify’s Net Income (US$ Million) | Notes |
| Q2 2020 | $36 | Pandemic |
| Q2 2021 | $284.6 | Pandemic |
| Q2 2022 | -$1,203.9 | Logistics Business Included |
| Q2 2023 | -$1,311 | Logistics Business Offloading |
| Q2 2024 | $171 | Without Logistics Business |
Shopify’s revenue continued to grow by 21%, but its operating expenses fell by 67% because of the absence of the logistics business. In the run-up to the holiday season, Shopify stock could see a strong seasonal rally as the Bank of Canada began interest rate cuts in June.
