Shopify (NYSE:SHOP) is a business seemingly tailor-made for a world where physical retail stores are closed and consumers are afraid to leave their homes. The company sells subscription products that provide everything someone would need to sell products online. It's not crazy to think that e-commerce growth will accelerate in the long run because of the pandemic, and Shopify is well positioned to capture that growth.

The market has latched onto this story and then some. Shopify stock has more than doubled since bottoming out in March, pushing the valuation to stratospheric levels. Valued at nearly $90 billion, Shopify trades for over 55 times last year's sales, astronomical even for a fast-growing subscription software company. The company is unprofitable on an unadjusted basis, and losses are growing.

Shopify is a story stock, so valuation and losses don't really matter, at least not right now. What matters is growth and growth potential, and on that front Shopify delivers. Revenue was up 47% in the first , and the most optimistic view of the company's total addressable market would be the entire online retail industry.

A risk dial set to maximum.

Image source: Getty Images.

A problem with the story

If there could somehow be a pandemic without a recession, keeping people home but not wrecking the economy, Shopify would be in great shape. But that's not what's happening. The scope of the economic downturn is impossible to predict, but it's probably going to be bad. Nearly 40% of U.S. households making less than $40,000 lost a job in March, and significant job losses in higher strata of household income are likely as companies go into cash preservation mode.

Having more people stay home is great for e-commerce in a vacuum. But if those people have no money to spend, like during a severe recession with major job losses, demand for discretionary products is going to drop, regardless of whether they're sold online or in a store. For many small businesses, this drop in demand will unfortunately prove fatal.

Shopify's customer base consists of small businesses. That's great during an economic expansion, but not so great when the economy is cratering. The very first risk factor listed by Shopify in its annual report lays out the issue:

We have historically experienced merchant turnover as a result of many of our merchants being SMBs [small and medium businesses] that are more susceptible than larger businesses to general economic conditions and other risks affecting their businesses. Many of these SMBs are in the entrepreneurial stage of their development and there is no guarantee that their businesses will succeed.

Some percentage of Shopify's customer base is going to fold during the pandemic-driven recession. How badly the company is hit will depend on how fragile its customer base is. How many of Shopify's customers use the service as a side gig in a way that only works in a reasonably strong economy? How many were barely scraping by before the pandemic? How many will simply decide that going after a shrinking pool of demand is no longer worth it?

Shopify withdrew its full-year guidance for a reason -- there's a tremendous amount of uncertainty facing its business. Despite that uncertainty, the valuation implies that expectations are the highest they've ever been. That doesn't make much sense during what could be the worst economic downturn since the Great Depression.