Shopify (SHOP 0.29%) underperformed a declining market on Tuesday, trading lower by 7% as of 12:45 p.m. ET compared to a 3.1% slump in the S&P 500. The drop added to a tough year for shareholders -- the stock is now down nearly 80% so far in 2022.
Tuesday's decline was powered largely by marketwide pessimism, but also by specific concerns about Shopify's growth prospects.
The Nasdaq Composite index, home to many tech players, had shed 3.7% by 1 p.m. ET, and Shopify tends to move in sympathy with that index, which includes peers like eBay and Amazon. All of these e-commerce specialists were down on Tuesday.
Investors were also concerned by how high inflation remained in August. A report on the consumer price index Tuesday showed it rose 8.3% last month, only marginally lower than July's 8.5% rate. Persistently high inflation may lead the Federal Reserve to remain more aggressive with its interest rate hikes, raising the risk of a recession. Shopify also cited inflation as a major reason why its recent sales trends were so weak. "Persistent inflation at 40-year highs dampened online sales globally," CFO Amy Shapero said in a late July conference call.
Inflation won't just hit Shopify's business, so concerns about that headwind alone are not a good reason to sell the stock. The company has been winning market share even as growth has slowed in the e-commerce niche, and continued gains on that front would imply solid investor returns ahead.
However, management projected that before its earnings picture brightens starting in late 2022, its losses would increase in the current quarter. The prospect of more losses in the short term, coupled with a further weakening of demand trends, means Shopify stock is like to fall when Wall Street grows more worried about a recession, as it did Tuesday.
Conversely, when fears of a demand pullback ease, its share price might jump sharply. Investors should do their best to ignore those short-term swings, and instead focus on the fundamentals that will drive Shopify's returns over the next few years, including its market share and bottom-line profitability trends.