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Why Shopify Stock Tumbled Another 6% Today

By Nicholas Rossolillo – Jan 10, 2022 at 12:57PM

Key Points

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Investors are rerating expectations against the prospect of higher interest rates.

What happened

Shares of e-commerce software giant Shopify (SHOP 4.24%) were down 6.2% today as of 12:45 p.m. ET. This most recent drop builds on the downturn it and other high-growth stocks have suffered, first from the emergence of the omicron coronavirus variant in late November and now the prospect of higher interest rates from the Federal Reserve to try and tame inflation. Shares have now lost about one-third of their value since last reaching all-time highs in November 2021.  

So what

Shopify is an incredible company. It's doing great things for the e-commerce and fintech world and helping hundreds of thousands of small businesses and aspiring entrepreneurs get their journey started in the digital era. This has led to incredibly fast growth for Shopify. Its global merchants reported a 23% year-over-year increase in 2021 Black Friday and Cyber Monday sales, hinting at a huge win for digital commerce this past holiday shopping season.  

Two people working on a website.

Image source: Getty Images.

However, as great as Shopify's business is, the prospect of higher interest rates is proving problematic for stock prices of fast-growing companies. Higher rates lower the value of future cash flows, which in turn lowers the present value of a stock. Even after the sharp sell-off in recent months, Shopify still trades for over 30 times trailing-12-month sales, and it operates on a slim profit margin -- albeit intentionally as the company spends heavily to support its rapid expansion.  

Now what

In spite of all the negativity swirling around the highest growth stocks right now, nothing has really fundamentally changed for Shopify. E-commerce is booming, and the software outfit has all sorts of tools to help small businesses succeed -- everything from digital payments solutions to online marketing to order fulfillment and shipping. It still trades for a premium price, but Shopify will be just fine. Just bear in mind if you decide to buy now (or add to an existing position), 2022 could be another volatile year as the market tries to digest rising interest rates and inflation.

Nicholas Rossolillo and his clients own Shopify. The Motley Fool owns and recommends Shopify. The Motley Fool recommends the following options: long January 2023 $1,140 calls on Shopify and short January 2023 $1,160 calls on Shopify. The Motley Fool has a disclosure policy.

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