Shopify (SHOP 0.29%) has been crushed this year, falling more than 77% in 2022 alone. A lot of this has been due to an increasing belief that the U.S. economy could fall into a recession. Shopify helps small and medium-sized businesses (SMBs) build and grow their commerce operations by providing a suite of products that allows them to compete with larger companies. 

The company sells subscriptions to products, but Shopify also makes money from payment processing and currency conversion fees, meaning it gets paid in part by activity on the platform. With fears of a recession and consumer budgets tightening -- especially on discretionary goods like those sold by e-commerce merchants -- investors believe that Shopify could get hurt by less activity over the coming months. 

While this might be true, Shopify still has a lot of opportunity over the long term. This dominant e-commerce company might struggle in the short term, but here are three reasons it could thrive for many years ahead. 

Person working from home for their small business.

Image source: Getty Images.

1. Shopify is still a top dog

Shopify is trying to "democratize commerce," meaning it helps SMBs offer similar services to what larger businesses provide. Take two-day shipping, for example. Traditionally, only the large businesses with scale, partnerships, and in-house logistics have been able to offer this, making it hard for independent SMBs to compete on delivery speed -- that is, until Shopify started to offer two-day shipping for consumers that use the Shopify Fulfillment Network, the company's own logistics offering.

This democratization is taking place in many product categories. Shopify now allows SMBs to sell across borders seamlessly, for example, with Shopify Markets. The company even has a lending business that funded $347 million in loans for Shopify merchants in Q1. While it doesn't sound special, all of these products help SMBs keep up with larger businesses that may have more capabilities, money, or scale.

This all-in-one platform has allowed SMBs to rapidly grow their businesses, and Shopify has become a top dog because of it. Millions of merchants use Shopify, and over 597 million consumers bought from Shopify merchants in 2021, resulting in a 10% market share of the U.S. retail e-commerce space over that period. This supersedes the penetration of Walmart (WMT 0.26%), The Home Depot (HD 1.01%), and Wayfair (W 0.87%) combined.

As a result of this leading solution, Shopify has seen stable adoption. The gross merchandise volume (GMV) that Shopify facilitated in Q1 2022 reached $43.2 billion, a 16% year-over-year increase. This helped revenue soar 22% year-over-year to $1.2 billion.

A primary concern for Shopify is its competition. The company will need to create the best product suite to stay on top, but with almost $254 million in trailing 12-month free cash flow, Shopify is generating more cash than peers like BigCommerce (BIGC 0.77%) and even Amazon (AMZN 0.83%). This impressive cash generation could allow the company to drive innovation in the space and leave competitors in the dust.

2. E-commerce is on the rise

While e-commerce activity might slow over the short term, the long-term opportunity is still quite lucrative. The International Trade Administration sees global e-commerce sales in 2024 reaching $6.4 trillion, representing 22% of global retail sales, compared to only 18% in 2020. Considering Shopify processed $175 billion in GMV in 2021, the company has only scratched the surface of its total potential.

If a recession were to impact the U.S., Shopify would likely see a decline in its top line. However, the trends are clear that the adoption of e-commerce globally will likely increase, which should allow Shopify to thrive over the long term.

3. Shares are dirt cheap

Because of these short-term fears, investors have sent the stock to a low valuation. Shopify shares trade at only 8.3 times sales, their lowest valuation since 2017. Yes, the shares were likely overpriced in 2020 when they traded at 60 times sales, but the price today is historically low for the company, and should be appealing to investors. 

Shopify might have some challenging headwinds over the coming months, but it's clear that the long-term thesis for Shopify is still on track. It has a leading platform that is seeing rapid adoption, and its free cash flow is strong enough to allow it to keep innovating to maintain its dominance. As long as the company continues to grow -- as shown by revenue and GMV expansion -- the company looks like a solid buy today. I recently loaded up on shares, and you might want to consider doing the same.