What happened
Shares of Shopify (SHOP 3.19%) were falling today in another risk-off day for the stock market. Though there was no direct news out on the e-commerce software company, stocks tumbled broadly this morning as yesterday's relief rally on the Bank of England's decision to buy bonds to shore up the British pound gave way to more selling today.
A strong initial unemployment claims report seemed to feed the bearish sentiment, signaling that the Federal Reserve may have a ways to go in order to bring inflation under control as the economy is still running hot.
As an unprofitable growth stock, Shopify is more sensitive to the macroeconomic climate than most stocks, and it also has direct exposure to consumer spending, making it different from most of the software-as-a-service (SaaS) sector.
As of 10:27 a.m. ET, the stock was down 6.1% while the Nasdaq had lost 3.1% at the same time.
So what
Stocks have been drifting lower since last week's fed funds rate hike. The Federal Reserve warned that it expected to continue raising rates and leave them at a high level in order to bring inflation under control. It acknowledged that that may result in higher unemployment rates and even a recession, but said that it was better for the long-term health of the economy to rein in inflation now.
Rising interest rates have impacted growth stocks more than other stocks because higher interest rates make profits in the future worth less since the discount rate in financial models rises.
Shopify is also facing its own challenges. Its growth rate has slowed dramatically as the pandemic tailwinds have faded, and investors are worried that Amazon's Buy with Prime platform could kneecap its most valuable revenue stream, payments.
Now what
Shopify's revenue growth should improve from the 16% clip it posted in the second quarter as the company was facing difficult comparisons with 2021, but a recession would make a recovery even harder for the company.
The stock is down more than 80% from its peak, but Shopify will have to convince investors that it can accelerate its growth again in a post-pandemic world in order for the stock to bounce back.
