Since July’s end, Shopify (NYSE: SHOP) stock has been moving upwards. This is a significant increase. might believe it’s a sign that SHOP stock has been able to reach its lowest point and is poised to see a significant rebound. However, it’s far from being the start of a rebound, the scenario being happening with shares of the software for e-commerce is best described as an “dead cat bounce.”
Also, it was able to experience a short-term rise after a prolonged price drop. In addition the bounce that was dead cat was more the result of an external cause instead of company-related news. In addition the positive effect of this external cause has begun to diminish.
Market conditions are once more in a negative direction. In conjunction with issues at companies which aren’t yet solved, investors may overlook a improvement. A return to the lows is likely. The decision to avoid SHOP stocks is still the best option.
SHOP Stock and Its ‘Dead Cat Bounce’
As I mentioned in my previous article about Shopify there was information from the company which led to a slight gain in July. However, this new increase is more market-related, namely the increased expectation of it is likely that Federal Reserve will cut interest rates in the coming year.
Due to the increased likelihood of recession, investors believed that it was likely to take place. The possibility of reducing rates next year, after increasing rates this year to combat inflation, will ease the economic recession. This would also be a good thing for stocks, particularly those that are growing like SHOP. The rapid rise in interest rates been a factor in the stock’s massive decline year-to-date (YTD).
However, the most recent macro data have dampened the belief that rate cuts are ahead. The job report that was released last week indicates that the Fed may be able to raise rates more without increasing unemployment.
When today’s Consumer Price Index (CPI) figures show that inflation is becoming more severe, markets will take it as a signal that the Fed is moving forward with its fiscal policy of hawkishness. Although market conditions are getting worse, the headwinds that have affected the performance of the index continue to linger.
There’s Still Considerable Downside Risk
An upbeat CPI number indicates that the Fed isn’t slowing down by increasing rates of interest. As lower rates are great for stocks that are growing however, higher rates are detrimental for these stocks. A rise in interest rates reduces the worth of the future profits. That’s bad news for high price SHOP stock. It’s trading at a premium price.
At the current price, Shopify trades for 417.2x the estimated 2023 earnings. Shopify is already at risk for a devaluation, independent of outside factors such as interest rates. It is possible to argue that its value is currently acceptable if it were increasing at the rate of a 57% rate annually (like it did the year before).
Based on its most recent financials, its current valuation isn’t a good idea. The growth in revenue in the last quarter was slowed to 16 percent. A slowing pace of growth, paired with the rising cost of living resulted in an adjusted decline of just 3 cents. Analysts were expecting earnings of 3 cents per share.
Even more troubling, the improvements in performance are more likely to occur in the future rather than sooner. The company admits this and cited factors such as the rising cost of living and inflation rates that are likely to stress consumers. Already costly due to expectations that Shopify could not achieve, more uncertainty and disappointment are on the horizon.
The Verdict
With my skepticism about Shopify It should come as not a surprise that it continues to get an F grade on my Portfolio Grader. In the last twelve months ago, the business had plenty to offer. The growth in e-commerce was still high despite the fact that pandemic tailwinds had begun to fade. It was in growth mode. In the moment that was dominated by its “growth at any price” attitude, it appeared to be nearly unbeatable.
The script has been changed. The slowdown in the economy is affecting demand for the company’s services. The growth has slowed to a crawl and the company has reported net losses. Increased interest rates have led to the growth stocks falling out of fashion.
Even though it’s down almost 78 percent from the high-water mark There’s plenty of evidence to suggest SHOP stock taking another significant drop in its price. This means that you shouldn’t consider its recent bounce that was dead as an offer to purchase.