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Why Shopify, Pinterest, and Block Stocks Rallied on Monday

What happened

With the first half of the year behind us, 2022 continues to challenge investors and consumers alike. Rampant inflation, the “are we or aren’t we” of a recession, and the ongoing bear market have created a perfect storm of macroeconomic issues. Everyone is parsing the tea leaves and economic indicators, looking for signs that the worst may be behind us.

With that as a backdrop, investors pored over a couple of economic reports that suggest there may be light at the end of the tunnel, providing tailwinds for some of technology’s more beaten-down stocks. E-commerce platform provider Shopify (NYSE: SHOP) jumped as much as 7.5%, visual discovery engine Pinterest (NYSE: PINS) climbed as much as 4.1%, and Block (NYSE: SQ) rose as much as 3.9%. By the end of the trading day, the trio was still trading higher, up 4.7%, 2.7%, and 2.3%, respectively.

While checks of all the usual sources found nothing in the way of major company-specific news driving the gains, investors were likely bottom-feeding for beaten-down growth stocks that had simply fallen too far. And as the day drew to a close, there was further evidence at least one of those choices was a good one.

So what

The U.S. economy has experienced its second successive quarter of contracting economic activity, which technically meets the definition of a recession — but not all economists agree. Some argue that the strong jobs market and low unemployment offer proof that this “recession” is an anomaly, with these indicators providing proof that the economy is stronger than some believe.  

Another indicator that suggests things aren’t as bad as they might seem is a report by The Institute for Supply Management. Data revealed that even as manufacturing growth slowed, it still expanded for the 26th consecutive month, a barometer that also argues against a recession. 

Finally, the Federal Reserve Bank raised interest rates by 0.75% last week, marking the second increase of its size in as many months. Yet the language used by Fed chair Jerome Powell had changed, no longer signaling automatic rate hikes in the months to come (emphasis mine). “As the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases while we assess how our cumulative policy adjustments are affecting the economy and inflation,” Powell said. This suggests that sufficient progress has been made, meriting a pause before further action is taken.  

Now what

One of the common threads uniting these three companies is the accelerated growth they experienced at the height of the pandemic, followed by sell-offs resulting from buyer’s remorse among investors with something of a short-term view.

Shopify experienced triple-digit growth as shoppers flocked to e-commerce sites while avoiding many brick-and-mortar retailers. Consumers avoided large social gatherings and instead sought out new leisure activities with the inspiration provided by Pinterest. Block is one of the original fintech providers, and as digital and contactless payments became the rule rather than the exception, this played right into the company’s strengths.

As things returned to some semblance of normal, each of these disruptors saw growth return to historical averages, sending fair-weather investors running for the exits. Just last week, Shopify CEO Tobi Lütke admitted that even he thought the accelerating adoption of e-commerce would have a longer shelf life.

Yet investors shouldn’t sleep on any of these companies, as each is a leader in its respective industry or niche. Shopify is the leading supplier of tools that help merchants sell their goods and services online. Pinterest is the leading visual discovery engine for people looking for social media and inspiration without all the drama. Block revolutionized the payments space for small businesses with its Square credit card reader and continues to be a leading force in the industry.

We have early evidence that investors that stuck with Pinterest made the right call. After the market close on Monday, the company reported revenue and user numbers that held up better than many investors suspected, sending shares up as much as 20% in after-hours trading. 

Finally, each of these stocks is a relative bargain. Shopify, Pinterest, and Square are currently trading at nine, five, and two times trailing-12-month sales, respectively. While some view this as still a little frothy, these valuations are near historic lows. Furthermore, given their strong growth and secular tailwinds driving each of these industries, some would argue they are bargains at their current prices.

Danny Vena has positions in Block, Inc., Pinterest, and Shopify and has the following options: long January 2023 $1,140 calls on Shopify and long January 2023 $1,160 calls on Shopify. The Motley Fool has positions in and recommends Block, Inc., Pinterest, 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.

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