Interest rate cuts could be a catalyst for growth stocks: 2 stocks to buy and hold

Interest rate cuts are often perceived as good for stocks for at least two reasons. First, because lower interest rates make it easier for businesses to borrow money, they can help business grow. Second, lower interest rates mean fixed income assets like bonds are losing some of their appeal compared to stocks, so many investors are moving to stocks and bidding.

The relationship between interest rates and the stock market is complex and not set in stone, but stocks could benefit from the recent aggressive rate cut by the US Federal Reserve. Growth stocks, in particular, performed splendidly in the 2010s marked by historically low interest rates.

Could the same phenomenon be repeated? Let’s consider two stocks to invest in if it does — or even if it doesn’t: Shopify (STORE 5.49%) and Adyen (ADYE.Y -0.54%).

1. Shopify

Shopify’s initial public offering (IPO) took place in 2015. The company was a bit of a market darling until the end of the last decade — its stock seemed to defy gravity. The e-commerce specialist also performed well in the early days of the pandemic as retail transactions shifted from brick-and-mortar stores to online channels.

However, Shopify has not performed well since the start of 2021. It has faced tailwinds related to the pandemic, which suddenly stops and various economic problems. In the second quarter, Shopify’s revenue rose 21% year over year to $2 billion.

Not bad, but Shopify’s top-line growth rates have fallen since the pandemic highs.

Operating Income Data (Trimely YoY Growth) from YCharts.

Still, there’s a lot to like about the company’s business. For example, 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 shedding its logistics unit. Even though it had its advantages, it was an expensive and low-margin business. In addition, Shopify had a 10% share of the US e-commerce market by gross merchandise volume as of 2022. It is also the leading e-commerce software platform in the country, with a share of the 30 %.

Shopify undoubtedly 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 launch, the more options and versatility companies have on the platform.

This is a strong competitive advantage that should allow Shopify to remain a leader in its niche in the competitive e-commerce space, and there is plenty of room for growth. According to research firm eMarketer, e-commerce sales will reach $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 it won’t stop there.

E-commerce offers consumers an array of options that span virtually the globe, all from the comfort of their living rooms. Continued e-commerce adoption will be a strong tailwind for Shopify well beyond 2027.

The stock is worth holding, regardless of the short-term effect of interest rate cuts on stocks.

2. Adyen

The rise in e-commerce will also benefit Adyen — a Netherlands-based fintech specialist — as 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-sale systems), payment processing, and financial and risk management, all in one integrated platform.

That means you have to rely on different providers for each of these functions in each different region of the world. Adyen has attracted business from prominent corporations, from Spotify TO Uberamong many others.

Adyen’s financial results remain solid, although its top line isn’t growing as fast as it once was. In the first half of the year, Adyen’s revenues increased by 23.6% year-on-year to 913.4 million euros. Its processed volume increased by 45% year-on-year to 619.5 billion euros.

Adyen invested in its future and hired more employees a few years ago, even though most of its peers were doing the exact opposite. The company’s margins declined as a result, but are now improving again. In the first half of 2024, Adyen’s earnings before interest, taxes, depreciation and amortization (EBITDA) was 46%, up from 43% reported in the comparable period of the previous fiscal year.

The company’s earnings per share rose 45% year-on-year to €13.15. Adyen has had a rough time in the market since 2021, but has largely bounced back this year, partly due 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 the fastest-growing region (in terms of revenue) for some time. Adyen continues to expand into other regions as well.

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 disruption by jumping ship, so they won’t do it unless they have an excellent reason to.

Here’s the bottom line: Adyen is a leader in a market poised for growth, generates consistent revenue and earnings, and has a strong moat. These factors make the stock worth investing in.