What happened
Growth stock summer could finally be over. Shares of well-loved e-commerce platform Shopify (SHOP 1.23%) sunk 15% this week as investors sold off growth stocks after the Federal Reserve remained hawkish on interest rates. Investors might also be getting increasingly pessimistic due to competitive pressures from e-commerce giant Amazon and its encroachment on Shopify's market. The stock is still up 49% year to date, handily beating the 13% return for the S&P 500.
So what
This week, the Federal Reserve remained restrictive with its interest rate policy, keeping the fed funds rate at a range of 5.25% to 5.50%. This sets interest rates for the broader economy, which is why short-term U.S. Treasury bonds now pay a 5.50% annual rate, a risk-free investment that can earn you a healthy income stream.
What does this have to do with Shopify? When interest rates remain high, investors tend to favor safer investments that offer higher yields with lower risks. Shopify is a money-losing growth stock that doesn't pay anything to investors today. As the Federal Reserve signals to investors that interest rates could remain higher for longer, traders are going to favor safer bets such as U.S. Treasury bonds over Shopify. This is a key reason its shares dipped this week along with those of many other growth stocks.
Another factor that could be hurting the stock is the Aug 30 announcement from Shopify that it was finally partnering with Amazon and its Buy With Prime checkout option. This new feature from the e-commerce giant allows third-party websites to use Prime shipping for their shoppers, but only if you allow Amazon to process the payment.
Shopify is threatened by this because it makes the majority of its money through payment processing on its own checkout button. It is no surprise to see Shopify down considerably from the day this announcement was made.
NASDAQ: SHOP
Key Data Points
Now what
Shares are down, but they are still very expensive at a price-to-sales ratio (P/S) of 11, which is much higher than the market average of about 2.5. The company is also not profitable, with a net loss of $2 billion over the last 12 months.
Revenue is growing quickly (31% year over year last quarter), which is something for investors to latch on to. But make no mistake: Shopify shares are a risky bet at current prices. Investors need to see high revenue growth and margin expansion for many years in order for the investment to work out.
