When a stock or index falls 10% from its all-time high, it is said to be in correction territory. While this isn't as scary-sounding as a bear market -- denoted by a 20% fall -- it should give investors pause. Corrections often occur because of an event, and stocks are indiscriminately sold across the board.
A wide sell-off gives investors opportunities to grab stocks that may be caught up in the frenzy but whose business will be unaffected. Two stocks I believe are great buys are Shopify (SHOP 1.26%) and Alphabet (GOOG 1.43%) (GOOGL 1.42%). Each has seen its stock price fall recently, but the businesses are still thriving.
Image source: Getty Images.
1. Shopify
Starting a business can be difficult; selling the product online can be even more challenging. Shopify simplifies the process by providing website templates, payment processing, and shipping solutions at an affordable $29 per month. As a business grows and can afford to expand its e-commerce tool kit, Shopify has other tiers with upgraded features.
It's not just a small business enabler. Many large brands like Kraft Heinz and KKW Beauty -- Kim Kardashian's cosmetic line -- use its software. Shopify recently announced it was expanding its offerings for larger companies by providing two-day shipping and easy returns. An undertaking like this requires significant investment in warehouse space. Fortunately, Shopify is forward-thinking and already acquired 6 River Systems -- a robotic warehouse company -- to provide top-notch automation within the facilities. Shopify is providing best-in-class e-commerce solutions to businesses of all sizes, and this latest move reinforces that notion.
The company splits its revenue into two segments, merchant and subscription solutions. Subscription solutions are the base prices customers pay each month to access the tools Shopify offers. Growth in this segment can occur through two main avenues: New customers, or customers upgrading tiers. During the third quarter, Shopify's subscription solution grew 37% year over year to $336 million, but only made up 30% of revenue.
The larger segment, merchant solutions, grows as the stores on its platform increase their sales. As Shopify's customers do better, it does better. With merchant solutions up 51% year over year to $788 million, it's clear that countless businesses on Shopify are succeeding.
Shopify isn't consistently profitable and is best valued by comparing its stock price with its revenue, captured by the price-to-sales (PS) metric.
SHOP PS Ratio data by YCharts
After an elevated valuation during most of 2020 and 2021, Shopify's PS ratio has returned to pre-pandemic levels after the recent sell-off. While investors shouldn't expect Shopify to return to previous valuation highs, revenue growth going forward should directly correlate with its stock price if current valuation levels are maintained. With revenue growing 46% overall and Shopify expanding with larger businesses, the future is bright for the company's stock.
2. Alphabet
Contrasting Shopify's high growth and unprofitability is Alphabet -- the parent company of Google and YouTube -- which also has high growth but is insanely profitable. With its search engine and video sharing market dominance, Alphabet's primary offerings are unlikely to be disrupted by competitors.
| Segment | Market Share |
|---|---|
| Google Search Engine | 86% |
| YouTube | 76% |
Data source: Statista and Datanyze.
Because of each segment's supremacy, it can offer advertisers a diverse audience, making Alphabet a valuable advertising partner. While advertising spending grew marginally during 2020, 2021 was a different story. Google's Q3 search ad revenue grew 44% to $37.9 billion -- for context, Shopify's gross merchandise volume for Q3 was $41.8 billion. Comparing the incredible 44% growth with Q3 2020's mere 3% showcases how advertising businesses fare during difficult economic times. On the YouTube side, growth was similar at 43%, but revenue was much less than its search engine division at $7.2 billion.
At its core, Alphabet is an advertising business. Because advertisement spending tends to drop during recessions -- it dropped by 13% across the board during the 2008 recession -- Alphabet will likely receive a lower valuation due to this risk.
GOOG PE Ratio data by YCharts
Still, a 29 price-to-earnings ratio is dirt cheap for a company growing its earnings at a 71% clip. As long as the economy doesn't grind to a halt, Alphabet's advertisement business will continue providing absurd growth numbers.
One division that isn't a market leader is Google Cloud. It only has an 8% market share versus Amazon Web Services' 32% and Microsoft Azure's 21%, according to Statista. With Azure growing 46% during the fourth quarter, investors need to watch Alphabet's Q4 earnings report to see if Google Cloud is gaining ground or if it is struggling against its bigger competitors. Regardless, if advertisement revenue continues to increase, Alphabet will still report strong earnings.
With most of the correction concerns circling around interest rate hikes by the Federal Reserve, it hardly affects Shopify's and Alphabet's business. Although the stock prices may mean some short-term pain, each business is focused on the long term, just like investors should be. Purchasing both these stocks on sale and holding for three to five years allows investors to reap the benefits of a growing business while riding out any market-induced volatility in the stock prices. Both these stocks are attractively valued, so it could be a great time to take advantage of the market's short-term thinking to own two long-term winners today.
