The Federal Reserve raised its benchmark interest rate by 0.75% yesterday, the central bank’s second consecutive move of this magnitude. However, the benchmark indexes jumped in yesterday’s session on investors’ expectations of a softer recession.

Despite the market’s rally following the Fed decision, Morgan Stanley is urging investors to hold off on investing in stocks. The company’s top U.S. equity strategist and chief investment officer, Mike Wilson, said that Wall Street’s euphoria about the possibility that interest rate rises may slow down earlier than anticipated was unwarranted and worrisome.

Shopify Inc. (SHOP) and Snap Inc. (SNAP) have witnessed high volume trading lately, with most investors dumping these stocks. Because of their poor growth attributes and current market uncertainties, we think these stocks are best avoided now.

Shopify Inc. (SHOP)

SHOP is an e-commerce company that operates in Canada, the United States, Europe, the Middle East, Africa, Asia Pacific, and Latin America. It sells bespoke themes and applications, domain name registration, and merchant solutions, including payment acceptance, shipping and fulfillment, and working capital security. SHOP has traded at an average trading volume of 43.04 million over the past three months.

Shopify announced Tuesday that it would cut about 1,000 employees or 10% of its worldwide staff. CEO Tobi Lutke stated in a note to colleagues that he had underestimated the duration of the pandemic-driven e-commerce boom and that Shopify will be cutting several positions in light of a general decline in online expenditure.

SHOP’s total revenue increased 15.7% year-over-year to $1.29 billion in the second quarter ended June 30, 2022. However, its loss from operations came in at $190.21 million, compared to income from operations of $139.44 million in the prior-year period. The company reported a net loss of $1.20 billion, compared to a net income of $879.09 million in the second quarter of 2021. Its loss per share amounted to $0.95 over this period.

The company’s EPS is expected to decline 100% and 94.4% in the current and next quarter, respectively. The stock has declined 77.3% over the past three months and 5.6% over the past month.

SHOP’s POWR Ratings are consistent with this bleak outlook. The stock has an overall rating of F, which translates to a Strong Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

SHOP has been graded an F grade for Stability and a D for Quality and Value. Within the F-rated Internet – Services industry, it is ranked last of 30 stocks.

Click here to see additional POWR Ratings for Growth, Sentiment, and Momentum for SHOP.

Snap Inc. (SNAP)

SNAP’s primary product, Snapchat, is a camera app that allows consumers to interact visually with friends and family via brief movies and photographs known as Snaps. Snapchat is its main mobile device application, with five tabs. The stock has traded at an average volume of 53.86 million over the past three months.

For the second quarter ended June 30, 2022, SNAP’s revenue increased 13.1% year-over-year to $1.11 billion. However, the company’s operating loss grew 108% year-over-year to $400.94 million. Its net loss surged 178% from the prior-year quarter to $422.07 million, while its non-GAAP loss per share came in at $0.02. In addition, its adjusted EBITDA declined 94% from the year-ago value to $7.19 million.

SNAP’s EPS is estimated to decline 111.8% in the current quarter. The stock has declined 87.1% over the past year and 64.8% over the past three months.

SNAP’s weak fundamentals are reflected in its POWR Ratings. The stock has an overall D rating, equating to a Sell in our proprietary rating system. The stock has a D grade for Stability, Sentiment, and Quality. In the F-rated Internet industry, it is ranked #59 of 65 stocks.

In addition to the POWR Ratings grades I have just highlighted, you can see SNAP ratings for Momentum, Growth, and Value here.

SHOP shares fell $1.17 (-3.32%) in premarket trading Thursday. Year-to-date, SHOP has declined -75.21%, versus a -14.89% rise in the benchmark S&P 500 index during the same period.

About the Author: Pragya Pandey

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate. More...

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