Since the end of July, Shopify (NYSE:SHOP) stock has been trending higher. With this uptick, you may think that SHOP stock has already bottomed out and is ready to make a real recovery. Yet far from the start of a rebound, what’s played out with shares in the e-commerce software company can be best described as a “dead cat bounce.”
In other words, it has experienced a temporary move higher after an extended price decline. Furthermore, this dead cat bounce was more the product of an external factor rather than company-related news. To top things off, the positive impact of this external factor has started to wane.
Market conditions are again growing unfavorable. Coupled with company issues that are far from cleared up, investors can forget about a further recovery. A move to new lows remains likely. Skipping on SHOP stock continues to be your best move.
SHOP Stock and Its ‘Dead Cat Bounce’
As I discussed in my last article on Shopify, there was company-related news that gave it a brief boost in July. However, this latest uptick is due to something more market-related: increased hopes that the Federal Reserve will cut interest rates next year.
Given the growing chance of a recession, investors temporarily became confident that this would happen. Cutting rates next year, after hiking them this year to tackle inflation, would soften the blow of an economic downturn. It would also be a positive for stocks, especially growth stocks like SHOP. The sharp rise in interest rates has played a role in this stock’s big drop year-to-date (YTD).
Unfortunately, the latest macro data has dampened confidence that rate cuts are just around the corner. Last week’s strong jobs report suggests the Fed can raise rates further without causing unemployment to skyrocket.
If this week’s Consumer Price Index (CPI) numbers show inflation is getting worse, the market will view that as a sign the Fed will move forward with its hawkish fiscal policy. While market conditions are again becoming unfavorable, headwinds that have also hurt its performance continue to persist.
There’s Still Considerable Downside Risk
A high CPI number will signal the Fed’s not slowing down with raising interest rates. Just as lower rates are good for growth stocks, higher rates are bad for them. Higher interest rates decrease the present value of future earnings. That’s bad news for richly priced SHOP stock. It continues to trade at a premium valuation.
At current prices, Shopify trades for 417.2x estimated 2023 earnings. The stock is already vulnerable for a de-rating, independent of external factors like interest rates. One could argue its current valuation would be reasonable, if it was continuing to grow at a 57% annual clip (like it was last year).
But based on its latest financials, today’s valuation makes little sense. Revenue growth last quarter slowed to just 16%. Slowing growth, coupled with rising costs, led to an adjusted quarterly loss of 3 cents per share. Analysts expected earnings of 3 cents per share.
Worse yet, improvement in results is more likely to happen later than sooner. The company itself has admitted this, citing factors like high inflation and rising interest rates that will continue to put pressure on consumers. Already pricey based on expectations that Shopify may fail to meet, more disappointment and downside risk is in store.
The Verdict
Given my bearish view on Shopify, it should be no surprise that it continues to earn an F rating in my Portfolio Grader. As recently as a year ago, the company had a lot going for it. E-commerce growth was still strong, even as pandemic tailwinds were fading. It was still in high-growth mode. With the market at the time of the “growth at any price” mindset, it appeared near-unsinkable.
Now, the script has been flipped. The economic slowdown is severely hurting demand for its services. Growth is grinding to a halt, and the company is reporting net losses. Higher interest rates have resulted in growth stocks going out of favor.
Although down nearly 78% from its high-water mark, there’s plenty pointing to SHOP stock experiencing another material plunge in price. With this, don’t view its recent dead cat bounce as an invitation to buy.
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Featured Image Credit: Mali Maeder; Pexels; Thank you!
