Shares of rate-sensitive growth stocks Shopify (SHOP 1.11%), Opendoor Technologies (OPEN 3.38%), and Upstart Holdings (UPST 2.76%) rallied this week, up 11.7%, 21.2%, and 21.7%, respectively, according to data from S&P Global Market Intelligence.
Shopify is a high-growth e-commerce stock, Opendoor is an online e-commerce platform that buys and sells homes, and Upstart is a loan underwriter, mostly for unsecured personal loans and auto loans.
What do they have in common? Each is extremely sensitive to the interest rate environment, and each stock has been absolutely clobbered over the past two years by the fastest-ever series of interest rate hikes in history.
However, this week, two reports showed cooling inflation that came in lower than expected. Given that these names have been so beaten down, a possible change in the rate environment enabled a rally in these stocks during this momentous week.
High-growth e-commerce, real estate, and lending platforms need lower rates
On Tuesday, the Bureau of Labor Statistics released the October Consumer Price Index. Prices were flat month over month and up just 3.2% year over year (YOY). Stripping out volatile energy and food prices, prices rose 0.2% month over month and 4% YOY. All these readings validated the downward inflation trend and came in below analyst expectations.
Then on Wednesday, the October Producer Price Index (PPI), which measures wholesale prices, also came in lower than expected by an even greater amount. Prices actually fell 0.5% month over month and were up just 1.3% YOY, with "core" PPI up just 0.1% month over month. All were below expectations.
In response to these readings, the 10-year Treasury Bond yield fell to 4.44% to end the week, down from 4.67% at the beginning of the week and a recent high of 4.99% in October.
None of these three stocks are profitable today, based on trailing 12-month numbers. They're all considered "growth stocks" with all their profits, and therefore, intrinsic value, far out in the future. So, the fact that long-term interest rates rose to a 17-year high last month puts a lid on the valuations of all growth stocks, regardless of performance.
Image source: Getty Images.
Of course, interest rates also affect demand, especially for these businesses. Shopify, which powers direct-to-consumer e-commerce websites, is dependent on online shopping activity among its customer base. Shopify actually reported good numbers for the third quarter earlier this month, showing that consumers remain relatively resilient, and the stock appreciated.
The stock rose less than the other two names this week, as Shopify's move was likely more tied to valuation -- an expensive 13 times sales and 66 times next year's earnings estimates -- rather than a reassessment of the business outlook, which was already strong.
But Opendoor and Upstart likely rose much more because lower rates would turn around their current weak business prospects. Opendoor buys and sells homes, but the rapid rise in interest rates has slowed the housing market to a crawl. Rising rates have priced many prospective buyers out of the market, while prospective sellers with lower locked-in mortgage rates are reluctant to sell and take on a higher-rate mortgage on a new home.
Given that Opendoor's revenue is dependent on transaction activity, its revenue plunged over 70% last quarter. Therefore, Opendoor really, really needs lower rates to spur housing transactions again.
Upstart also saw revenue decline over 10% last quarter, and even that was an improvement from earlier in the year. Upstart is dependent on third parties like banks and asset managers to buy its loans, as Upstart doesn't have its own deposits to hold loans on its balance sheet. But as rates rose rapidly and these buyers' costs of capital went up, they fled and stopped buying Upstart's three- to seven-year loans, due to the uncertainty.
However, as interest rates peak and hopefully go down, these buyers should get more comfortable with their own deposit and hurdle rates, and therefore may feel better about coming back to buy Upstart's loans. So, the prospect of lower interest rates catapulted Upstart's stock as well.
These stocks are still risky bets
In an uncertain interest rate environment and economy, any unprofitable stock is a risky bet. Therefore, while this week was good news for all, these names are by no means out of the woods just yet.
In addition, the past two years have now exposed the flaws and risks in these stocks' business models -- especially for Upstart and Opendoor. So while they may see large gains from time to time and could make for a good "recovery" trade, it's a long shot that they will be able to retake their all-time highs from 2021 anytime soon, or ever.
