It's no secret that many major stocks are down big off their highs. But what's even stranger is to see Amazon (AMZN 1.30%) and Shopify's (SHOP 4.90%) stock prices at lower levels today than they were two years ago. Bear in mind that two years ago was mid-May 2020 -- a time when the extent of the COVID-19 pandemic was still widely unknown, unemployment was raging, and government support had not yet materialized.
Here's why these two growth stocks could be worth considering now, despite their recent falls in stock price.
AMZN Percent Off All-Time High data by YCharts
The case for Amazon
Despite being one of the most influential and powerful companies in the world, Amazon stock is now nearly 12% lower today than it was two years ago and is down over 42% from its all-time high.
Amazon is facing slower growth, inconsistent cash flow, and questionable profitability as it stays true to its old strategy of reinvesting in its business as much as possible. The strategy is high-risk in that Amazon's growth needs to be sizable enough to justify a lack of profit. As of right now, it's not, and its stock has sold off accordingly.
In 2012, Amazon earned $61 billion in sales and lost $39 million. 10 years later in 2021, Amazon earned $470 billion in sales and booked $33.4 billion in profit. That's more than a seven-fold increase in sales and a sizable profit for a company that was losing money a decade ago. But here's the catch: Amazon's stock price increased by a factor of nearly 18 between the start of 2012 and the first day of 2022. Put another way, Amazon's growth was reflected in its market cap, which increased from less than $100 billion in 2012 to over $1.5 trillion at the start of 2022.
What's all that history got to do with the Amazon of today? In order to back up that $1.5 trillion valuation, Amazon must either sustain a lofty top-line growth rate or compensate for a slowing growth rate with better profitability and positive free cash flow. The issue now is that Amazon's top-line growth is slowing and its free cash flow is negative because the company currently spends more cash than it earns through business operations. That's a slippery slope in a market that has no patience for overspending.
However, the strength of Amazon Web Services (AWS), the company's cloud computing infrastructure arm, should not go unnoticed. AWS' trailing-12-month (TTM) revenue is $67.1 billion and operating income is $20.9 billion, which represent respective year-over-year increases of 38% and 43%. You would be hard-pressed to find a stand-alone software company the size of AWS growing its sales and profit at such a rapid pace.
Simply put, the value of AWS alone is a good enough reason to scoop up shares of Amazon on sale. Throw in its e-commerce business, Amazon Prime Video, and the continued growth of Amazon-owned services like Twitch, and you have a company that is built to last.
The case for Shopify
If there's one growth stock in this market that reminds me of a diamond in the rough, it's Shopify. The e-commerce stock now finds itself down over 80% from its all-time high, down over 50% in the last two years, and down below its pre-pandemic price. That sell-off is shocking considering how much more attractive Shopify's business is today than it was two years ago.
Yet, it's hard to ignore that investors got way ahead of themselves by valuing Shopify at a market cap of over $200 billion before it matured into a business sizable enough to "earn" that market cap. This type of pattern, though, has happened before. If we look back at the dot-com bust of the early 2000s, even stocks like Amazon were very much overvalued and fell 93% from their all-time highs. That wasn't Amazon's fault per se, but was more so due to investors getting over-excited and valuing a company based on what it could be rather than what it was at the time.
Today, Shopify's growth is slowing. But make no mistake, the business is still growing revenue at a 20%-plus rate even as it laps its incredible 2021 results. Shopify makes a little less than a third of its revenue from its Subscription Solutions business, which is a monthly plan for Shopify services. The other two-thirds of revenue comes from its Merchant Solutions business, which are tools that customers use to grow their sales. Shopify also takes a cut from gross merchandise volume (GMV), which is basically sales flowing through Shopify merchants. Similar to Visa or Mastercard -- both of which charge merchants fees when customers use credit cards -- or PayPal, which charges transaction fees, Shopify takes a cut of sales too. Therefore, it's no surprise that GMV makes up the largest share of Merchant Solutions revenue.
This dependence on GMV revenue leaves Shopify exposed to a recession. If its merchants go out of business or make fewer sales, Shopify makes less money. It's the exact kind of business model that gets hit hard during an economic cycle. But it's also a business model that is built to last. Shopify wins when its customers make more money. So its interests are aligned with helping customers grow their businesses so they upgrade their subscriptions and use more of Shopify's services.
Simply put, Shopify is positioned to grow as more businesses go online and consumers process more transactions online. Shopify's integrated toolset is ideally suited for small and medium-sized businesses that lack the capital to commit to more expensive plans. But Shopify also offers flexibility so that client companies can scale spending over time. Unlike other e-commerce platforms that exclusively target small businesses, a company can start and grow with Shopify, sticking with the platform throughout its lifespan.
Proceed with caution
When stocks fall quickly off their highs, buyers may be overly excited to pull the trigger. However, before diving headfirst into an opportunity, take the time to understand the nuances of a business, including potential short-term struggles and the biggest risks that could alter your investment thesis.
Bear markets take no quarter and have no patience for lackluster results. If Amazon's and Shopify's e-commerce business slips along with the broader economy, Wall Street may not hesitate to push stock prices down further. But as long as the investment thesis remains intact and Amazon and Shopify maintain their positions as e-commerce leaders, the sell-off should prove to be an excellent buying opportunity for long-term investors.
