Macroeconomic uncertainty has been a headwind for many businesses, but Shopify (SHOP -1.97%) and Coinbase Global (COIN -5.27%) have really felt the bite of the bear market. After growing at a turbocharged pace throughout the pandemic, both companies have seen momentum fizzle as high inflation has put pressure on discretionary consumer spending.
To better manage costs, Coinbase announced in mid-June that it would cut 18% of its workforce, and Shopify followed suit with an announcement yesterday that it would reduce 10% of its own workforce.. To further complicate matters, the U.S. Securities and Exchange Commission (SEC) is reportedly investigating Coinbase on the grounds that it may have allowed investors to trade unregistered securities, causing shares to fall 20% in one day.
Those announcements have led to significant share price declines, accelerating the effects of disappointing financial results and weak guidance. Coinbase and Shopify are currently 84% and 80% off their highs, respectively.
Against that backdrop, Ark Invest CEO Cathie Wood sold 1.3 million shares of Coinbase stock on Tuesday, and bought 1.8 million shares of Shopify stock. Should investors follow her lead?
The case for Shopify
Shopify simplifies commerce. Its software unifies physical and digital storefronts like brick-and-mortar shops, online marketplaces, and direct-to-consumer (DTC) websites, allowing businesses to manage sales from a single platform. Shopify also provides a number of value-added services like payment processing, discounted shipping, and financing.
Generally speaking, DTC business models offer businesses a greater degree of control over the customer experience, allowing them to build lasting relationships that result in repeat purchases. Shopify's focus on DTC commerce differentiates it from marketplace operators like Amazon, and its broad portfolio of integrations and services has made Shopify the leading e-commerce software vendor as measured by user satisfaction and market presence.
Unfortunately, soaring inflation has weighed heavily on the business, and the company again fell short of guidance in second quarter. Revenue grew just 16% to $1.3 billion and Shopify posted a non-GAAP (adjusted) loss of $0.03 per diluted share, down from positive $0.22 per diluted share in the same quarter last year.
Many investors are understandably disappointed. Shopify has lost the momentum it picked up during the pandemic, and the situation may get worse as inflation continues to weigh on consumer spending. However, there are a few bright spots worth mentioning. First, despite slowing growth, Shopify has continued to gain market share in the U.S. this year, in both offline and online commerce. Second, management is executing on a strong growth strategy that should further differentiate the business over time.
Shopify recently acquired Deliverr to supercharge the build-out of the Shopify Fulfillment Network (SFN). Deliverr's artificial intelligence (AI)-powered network management software and its ecosystem of partner warehouses, carriers, and last-mile providers will augment Shopify's warehouse automation technology. Ultimately, the SFN will enable two-day delivery across the U.S., simplifying logistics for merchants and improving the experience for buyers.
With that in mind, Wood's decision to double down on Shopify makes sense. And with shares trading at nine times sales -- a significant discount to the three-year average of 38 times sales -- investors should consider buying this growth stock right now.
The case for Coinbase
Coinbase is a gateway to the burgeoning cryptoeconomy. It provides a number of products and services to retail traders and institutional investors, helping them buy, sell, spend, store, and stake crypto assets. The company also provides cloud services through Coinbase Cloud, helping developers build blockchain applications, staking infrastructure, and other crypto solutions.
Coinbase benefits from significant brand authority, due in large part to its reputation for security. The company operates one of the longest-running crypto platforms where customers have not lost money due to a security breach, and Coinbase was recently recognized as the safest crypto exchange by BrokerChooser. Thanks to that competitive edge, Coinbase is the largest crypto exchange in the U.S. as measured by trading volume.
Not surprisingly, the company has struggled throughout the current crypto market crash. Transaction fees currently account for the vast majority of revenue, and those fees are based on the price and quantity of the cryptocurrency being bought or sold. In other words, Coinbase has seen its ability to monetize trades sink alongside crypto prices.
In the first quarter, trading volume fell 8%, revenue plunged 35% to $1.2 billion, and the company posted a loss under generally accepted accounting principles (GAAP) of $1.98 per diluted share, down from a GAAP profit of $3.05 per diluted share in the same quarter last year.
On the bright side, Coinbase saw subscription and services revenue -- think crypto staking, cold storage fees, and cloud services -- more than double to $152 million in the first quarter. That trend bodes well for the future, indicating that Coinbase is becoming less dependent on trading volume.
Coinbase will almost certainly continue to struggle for as long as the crypto market remains suppressed. That may have factored into Woods' decision to sell, though Coinbase is still the 12th-largest position in Ark's portfolio of 141 stocks, suggesting that she is still bullish.
So, should investors sell (or buy) this stock right now? It depends. I see a bright future for Coinbase because I am bullish on the long-term potential of cryptocurrency. The crypto market is currently worth about $1 trillion, which is a fraction of the $106 trillion global equity market and the $124 trillion global bond market. Assuming that figure continues to rise, Coinbase should benefit in a big way. That being said, crypto bears should keep their distance from this stock.