Collapse of Shopify’s stock price appears to have little to do with anything the company did
Publishing date:
Jan 21, 2022 • 1 day ago • 3 minute read • 5 Comments
Shopify’s headquarters in Ottawa. The e-commerce company has plunged 46 per cent from an all-time high of $2,139.82 on Nov. 19. Photo by David Kawai/Bloomberg Shopify Inc. is mortal after all.
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The Ottawa-based maker of software that supports e-commerce sites and Canada’s champion in the digital economy had a great COVID crisis. Its share price surged more than 58 per cent between March 2, 2020 and May 6, 2020, when its market capitalization reached $121 billion, unseating Royal Bank of Canada as the most valuable company on the Toronto Stock Exchange.
But the 2022 tech wreck hasn’t been kind to founder and chief executive Tobi Lütke’s company.
The looming threat of interest rate hikes from central banks in Canada and the United States has triggered a flight from growth stocks, including Shopify, though analysts remain positive about the company’s prospects. Shopify lost its title as Canada’s biggest publicly traded company in the first week of January, falling back below Royal Bank, before tumbling past Toronto-Dominion Bank on its way to third place.
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Shopify’s stock closed at $1,110.40 per share in Toronto, a 48-per-cent plunge from the all-time high of $2,139.82 on Nov. 19. It was down more than 13 per cent on Friday alone.
The collapse of Shopify’s stock price appears to have little to do with anything the company did. Other pandemic-era favourites are on the same volatile rollercoaster this week. Netflix Inc. shares plunged more than 20 per cent on Jan. 21 after the company reported a weaker-than-expected 2022 outlook and disappointing subscriber growth. Amazon.com Inc. dropped nearly 10 per cent this week, evidence that even the mightiest technology companies are vulnerable to the current shift in investor sentiment.
Shopify founder and chief executive Tobi Lütke. Photo by Cate Dingley/Bloomberg Dan Romanoff, an analyst at Morningstar Inc., said the volatile exit from technology stocks should smooth out and there will be a return to normal once central banks deliver more clarity surrounding the timing of interest rate hikes.
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“If I was a gambling man, I’d say there’s not a ton more (sell-off) to go,” Romanoff said in an interview.
Shopify, along with other big software firms, enjoyed high valuations that pushed up share prices to record highs throughout the pandemic. After central banks dropped the rate of borrowing to near zero in the U.S. and Canada, and with many people forced to stay home and live online, investors poured money into companies that made lockdown life easier. Firms that focused on at-home entertainment, e-commerce and virtual work all benefitted.
This week, though, investors pushed the Nasdaq into correction after it closed 10.7 per cent below its November high on Wednesday. The broad sell-off prompted some analysts to slash their price targets for Canada’s tech darling.
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Deutsche Bank analyst Bhavin Shah cut his estimate for Shopify shares from US$1,650 to US$1,400, citing headwinds of slower consumer spending and increased e-commerce competition (The U.S.-listed shares closed at US$882.12 on Friday). Shah also said lacklustre performance by the company’s package fulfillment network, meant to rival Amazon.com’s, presents a risk to the Canadian e-commerce company’s performance.
Still, “we expect Shopify will report a solid end to CY21 as the company continues to benefit from new merchant growth and the shift to online commerce,” Shah wrote in a note to clients. He maintains a hold rating.
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Article content Romanoff said Shopify was overvalued as the stock price accelerated over the last two years, but he still believes the company has a sound business that will support it through this bout of volatility.
“I quite honestly am not really concerned about how Shopify is going to pull through. Their balance sheet is great. They are earning nice margins and revenue growth is still strong,” he said.
Shopify hasn’t announced a date for the release of fourth quarter earnings, but analysts expect their financials to come in February. In the third quarter ended Sept. 30, 2021, the e-commerce company brought in US$1.12 billion in revenue, 46 per cent growth from a year earlier.
Financial Post
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