Interest-rate cuts are often perceived as good for equities for at least two reasons. First, since lower interest rates make it easier for companies to borrow money, they can help spear business growth. Second, lower interest rates mean fixed-income assets, like bonds, lose some of their appeal compared to stocks, so many investors switch over to and bid up equities.
The relationship between interest rates and the stock market is complex and not set in stone, but equities could benefit from the U.S. Federal Reserve Bank’s recent aggressive interest-rate cut. Growth stocks, in particular, performed splendidly in the 2010s, marked by historically low interest rates.
Could the same phenomenon repeat itself? Let’s consider two stocks to invest in if it does — or even if it doesn’t: Shopify (NYSE: SHOP) and Adyen (OTC: ADYE.Y).
1. Shopify
Shopify’s initial public offering (IPO) was in 2015. The company was a bit of a market darling through the end of the last decade — its shares seemed to defy gravity. The e-commerce specialist also performed well in the early days of the pandemic as retail transactions switched from brick-and-mortar stores to online channels.
However, Shopify hasn’t performed well since early 2021. It has dealt with its pandemic-related tailwind coming to a screeching halt and various economic issues. In the second quarter, Shopify’s revenue increased by 21% year over year to $2 billion.
That’s not bad, but Shopify’s top-line growth rates have declined since their pandemic highs.
Still, there’s a lot to like about the company’s business. For instance, Shopify is making progress on the bottom line. It reported net earnings per share of $0.13 in the period, compared to a net loss per share of $1.02 reported in the year-ago quarter.
This was partly due to the company getting rid of its logistics unit. Even though it had its perks, it was an expensive and low-margin business. Further, Shopify held a 10% share of the U.S. e-commerce market by gross merchandise volume as of 2022. It’s also the leading e-commerce software platform in the country, with a 30% slice of the pie.
Shopify arguably benefits from switching costs and the network effect. To illustrate the latter, consider that the company boasts thousands of options on its app store that allow merchants to customize their stores. The more merchants on its platforms, the more attractive it is to app developers. The more apps they release, the more choices and versatility businesses have on the platform.
That’s a powerful competitive edge that should allow Shopify to remain a leader in its niche of the competitive e-commerce space, and there’s plenty of room to grow. According to the research company eMarketer, e-commerce sales will hit $7.96 trillion by 2027 — up from $5.82 trillion in 2023. That’s an increase of more than $2 trillion in just four years and won’t stop there.
E-commerce grants consumers a pool of options that practically span the globe, all from the convenience of their living rooms. The continued adoption of e-commerce will be a powerful tailwind for Shopify far beyond 2027.
The stock is worth holding onto, regardless of the short-term effect of interest-rate cuts on equities.
2. Adyen
The growth of e-commerce will also benefit Adyen — a fintech specialist based in the Netherlands — since online retail transactions require digital forms of payment. Adyen’s business is particularly valuable to multinational corporations. The company offers payment gateways (the online version of point-of-sales systems), payment processing, and financial and risk management all in a single, integrated platform.
That beats having to rely on different providers for each of these functions in each different region of the world. Adyen has attracted the business of some prominent corporations, from Spotify to Uber, among many others.
Adyen’s financial results remain solid, although its top line isn’t growing as fast as it once did. In the first half of the year, Adyen’s revenue increased by 23.6% year over year to 913.4 million euros. Its processed volume jumped 45% year over year to 619.5 billion euros.
Adyen invested in its future and hired more employees a couple of years ago, even as most of its peers were doing the exact opposite. The company’s margins dropped as a result but are now improving again. In the first half of 2024, Adyen’s earnings before interest, taxes, depreciation, and amortization (EBITDA) margin was 46%, up from the 43% reported in the comparable period of the previous fiscal year.
The company’s earnings per share increased 45% year over year to 13.15 euros. Adyen has had a challenging time on the market since 2021 but has largely rebounded this year, partly thanks to its strong results. And there’s more where that came from.
The company is based in Europe, but North America, where it estimates its addressable opportunity remains untapped, has been its fastest-growing region (in terms of revenue) for some time now. Adyen also continues to expand in other regions.
The company benefits from switching costs: Its customers depend on its platform for their day-to-day activities — to accept payments, no less. They risk business disruptions by jumping ship, so they won’t unless they have an excellent reason to.
Here’s the bottom line: Adyen is a leader in a market ripe for growth, generates consistent revenue and earnings, and has a strong moat. Those factors make the stock worth investing in.
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Prosper Junior Bakiny has positions in Shopify. The Motley Fool has positions in and recommends Adyen, Shopify, Spotify Technology, and Uber Technologies. The Motley Fool has a disclosure policy.
Interest Rate Cuts Could Be a Catalyst for Growth Stocks: 2 Stocks to Buy and Hold was originally published by The Motley Fool
