However, macroeconomic uncertainty has been a headwind for many companies Shopify (SHOP 11.70%) and Coinbase Global (COIN 11.15%) have really felt the bite of the bear market. After both companies grew at breakneck speeds during the pandemic, momentum has stalled as high inflation has put pressure on consumer discretionary spending.
To better manage costs, Coinbase announced in mid-June that it would be shedding 18% of its workforce, and Shopify followed suit yesterday with an announcement that it would be shedding 10% of its own workforce, the Securities and Exchange Commission (SEC) is reportedly investigating Coinbase with Reasoning that it may have allowed investors to trade unregistered securities, causing shares to fall 20% in one day.
These announcements have led to significant share price declines and accelerated the impact of disappointing financial results and weak forecasts. Coinbase and Shopify are currently 84% and 80% off their highs, respectively.
Against this backdrop, Ark Invest CEO Cathie Wood sold 1.3 million shares of Coinbase and bought 1.8 million shares of Shopify on Tuesday. Should investors follow their lead?
The case for Shopify
Shopify simplifies commerce. Its software brings together physical and digital storefronts such as brick-and-mortar stores, online marketplaces, and direct-to-consumer (DTC) websites, enabling businesses to manage sales from a single platform. Shopify also offers a range of value-added services like payment processing, discounted shipping, and financing.
In general, DTC business models give companies a greater level of control over the customer experience and allow them to build lasting relationships that lead to repeat purchases. Shopify’s focus on DTC commerce sets it apart from marketplace operators such as Amazonand its broad portfolio of integrations and services has made Shopify the #1 ecommerce software provider as measured by user satisfaction and market exposure.
Unfortunately, rising inflation weighed heavily on the business, and the company again underperformed forecasts in the second quarter. Revenue rose just 16% to $1.3 billion, and Shopify reported a non-GAAP (adjusted) loss of $0.03 per diluted share, compared to a positive $0.22 per diluted share in the prior-year quarter.
Many investors are understandably disappointed. Shopify has lost the momentum it gained during the pandemic, and the situation could get worse as inflation continues to weigh on consumer spending. However, there are some bright spots worth noting. First, despite slowing growth in the U.S. this year, Shopify has continued to gain market share in both offline and online commerce. Second, management is pursuing a strong growth strategy that should further differentiate the company over time.
Shopify recently acquired Deliverr to help expand the Shopify Fulfillment Network (SFN). Deliverr’s artificial intelligence (AI) based network management software and its ecosystem of partner warehouses, carriers and last mile providers will complement Shopify’s warehouse automation technology. Ultimately, the SFN will enable two-day delivery across the US, simplifying logistics for merchants and enhancing the experience for shoppers.
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 moving average of 38 times sales — investors should consider buying this growth stock now.
The case for Coinbase
Coinbase is a gateway to the burgeoning crypto economy. It offers retail traders and institutional investors a range of products and services, helping them buy, sell, spend, store and deploy crypto assets. The company also offers cloud services through Coinbase Cloud, helping developers build blockchain applications, staking infrastructure, and other crypto solutions.
Coinbase benefits from significant brand authority, thanks in large part to its reputation for security. The company operates one of the longest-running crypto platforms with no clients losing money due to a security breach, and Coinbase was recently named the safest crypto exchange by BrokerChooser. This competitive advantage makes Coinbase the largest crypto exchange in the US in terms of trading volume.
Unsurprisingly, the company has struggled during the current crypto market crash. Transaction fees currently make up the vast majority of revenue, and these fees are based on the price and quantity of cryptocurrency being bought or sold. In other words, Coinbase has seen its ability to monetize trades fall along with crypto prices.
In the first quarter, trading volume declined 8%, revenue fell 35% to $1.2 billion, and the company reported a loss under generally accepted accounting principles (GAAP) of $1.98 per diluted share , compared to GAAP earnings per diluted share of $3.05 for the same quarter last year.
On the plus side, Coinbase saw subscription and services revenue — think crypto staking, cold storage fees, and cloud services — more than double in the first quarter to $152 million. This trend bodes well for the future and suggests that Coinbase is becoming less dependent on trading volume.
Coinbase will almost certainly continue to struggle as long as the crypto market remains suppressed. That may have played a role in Wood’s selling decision, though Coinbase is still the 12th-largest position in Ark’s portfolio of 141 stocks, suggesting she’s still optimistic.
So should investors sell (or buy) this stock now? It depends. I see a bright future for Coinbase because I am optimistic about the cryptocurrency’s long-term potential. The crypto market is currently worth about $1 trillion, which is a fraction of the $106 trillion global stock market and $124 trillion global bond market. Assuming this number continues to rise, Coinbase should benefit greatly. That being said, crypto bears should stay away from this stock.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Trevor Jennewine has positions at Amazon and Shopify. The Motley Fool has positions in and recommends Amazon, Coinbase Global, Inc., and Shopify. The Motley Fool recommends the following options: long January 2023 $1,140 calls on Shopify and short January 2023 $1,160 calls on Shopify. The Motley Fool has a disclosure policy.