Last week was a big one for e-commerce giants. The 800-pound gorilla in the room -- Amazon (AMZN 0.78%) -- and the up-and-coming alternative platform -- Shopify (SHOP +0.19%) -- both reported stellar numbers. And yet, these two stocks have fallen (on average) over 10% since last week's highs.
Given the great numbers and envious market position both companies have, it seems downright wrong for their shares to move in that direction. Let's examine some reasons why this might have happened and -- more importantly -- why growth stock investors in both companies have little to worry about in the long run.
Image source: Getty Images.
First, the results
Before jumping into why the stocks fell, however, let's look at how they performed on the headline numbers.
We'll start with Amazon, which breaks its results into three segments: North American e-commerce, international e-commerce, and Amazon Web Services (AWS).
| Metric | Q3 2020 | Q3 2019 | Growth |
|---|---|---|---|
| North America | $59.4 billion | $42.6 billion | 39% |
| International | $25.2 billion | $18.3 billion | 38% |
| AWS | $11.6 billion | $9.0 billion | 29% |
| YTD free cash flow | $10.3 billion | $7.3 billion | 41% |
Data source: SEC filings. YTD free cash flow represents the first nine months of each year.
On virtually anyone's scale, these are fantastic results. The fact that a company valued over $1 trillion can grow at this rate is rare.
Shopify -- which has been a terrific stock but is valued at less than 1/10th the size of Amazon -- also posted great numbers. For those unfamiliar, gross merchandise volume (GMV) represents the amount of "stuff" sold via Shopify's e-commerce platforms.
| Metric | Q3 2020 | Q3 2019 | Growth |
|---|---|---|---|
| Revenue | $767 million | $391 million | 96% |
| GMV | $30.9 billion | $14.8 billion | 109% |
| YTD free cash flow | $144 million | ($26 million) | N/A |
Data source: SEC filings. YTD free cash flow represents the first nine months of each year.
Clearly, both of these companies are doing very well. And yet they both had some rough trading days over the past week. There are three timeless investing lessons we can learn from this situation.
1. Keep things in the correct (read: long-term) perspective
Sure, it's disappointing to see your stock fall that much in less than a week. At the same time, the difference between an investor and a trader is that the investor is only interested in long-term ownership. If we zoom out just a little, we see that both of these companies have been on amazing runs since the coronavirus-induced market crash in March.
Time will teach you that you must give thanks for returns like this. They are not common -- and they even include the recent downturns.
But if that doesn't convince you, let's zoom out even further, to five years. That should be the minimum time frame you're considering when making an investment.
You will not get any sympathy at a cocktail party for complaining about returns like this, and rightfully so!
2. Invest in businesses, not stocks
The second lesson is closely related to the first: Investors judge themselves based on how businesses, not their stocks, perform. Over the long run, a business and its stock should be one and the same in terms of performance. But in the short term, emotions often play a huge role in creating volatile price swings.
Again, if we simply back up and look at sales growth over the past five years at both of these companies, we see that they are not only impressive -- but have reaccelerated their growth during the era of COVID-19.
SHOP Revenue (TTM) data by YCharts.
The simplest way to translate the above: Amazon and Shopify were already important businesses before the pandemic. They are even more important now.
3. The stock market is forward-looking
Finally, it's important to remember that the stock market is more concerned about where businesses are headed than where they've been.
Given the remarkable gains in shares this year (see the first lesson), and in sales (see the second lesson), some investors may have been hoping for even rosier outlooks for the fourth quarter. Officially, Shopify didn't offer any forecast. Amazon said it believes revenue will grow 28% to 38% -- a very wide range.
Others may have decided to take some stock profits off the table due to a combination of uncertainty surrounding the election and the next wave of COVID-19 spreading across much of the world.
Every investor who sold has their own reasons -- these are just a few. Whatever those reasons are, it doesn't change the bottom line: long-term investors ought to be pleased with these results. Instead of licking your wounds from falling prices, it might be wiser to consider adding shares.
I'm not, as these are already my two largest holdings. But if they weren't, that's exactly what I'd be doing right now.
