The market is still experiencing a downturn. When will it bottom out? It's nearly impossible to predict. Moreover, investors shouldn't focus on trying to time the market. Although stocks might fall even more, they will surely recover eventually. In the long run, patience will pay off way more than trying to buy stocks precisely when they hit rock bottom.
One company that could continue to experience challenging times in the near term is Shopify (SHOP -2.70%). Shares of this e-commerce specialist have dropped by 78% year to date, and it might get worse. But investors should stick with Shopify stock anyway. Here's why.
Why Shopify stock might continue dropping
Some experts now see a recession within the next year as a virtual certainty. Economists at Bloomberg, the financial and media company, put the probability at 100%. That's troubling for individuals and corporations, including Shopify. The possibility of a recession will affect the company in several ways. The most obvious is that consumers will rein in spending.
Shopify offers merchants the ability to open online storefronts. The company's revenue is somewhat linked to its gross merchandise volume (GMV), or the total value of transactions conducted on its platform. If Shopify's merchants struggle during a recession because consumers spend less money, the company will struggle, too.
However, a recession isn't here yet, not officially anyway. One of the hottest economic issues right now is inflation, which remains near 40-year highs. The Federal Reserve has increased interest rates to help fight inflation, a move that isn't great for companies like Shopify. Raising money via debt is more costly in an environment with higher interest rates.
Less borrowing and lower investments can affect the bottom line of a company in the long run, as it can impact a company's growth trajectory -- something the market tends to factor in by adjusting the price of stocks downward. Shopify isn't consistently profitable yet, making it even more susceptible to this risk. It could make up for that by producing solid financial results.
But the company is unlikely to pull off the performance it needs to blow investors away and make them forget about every issue it faces. That's especially the case as it faces tough year-over-year comparisons: Shopify's business was healthy last year as a result of coronavirus-related dynamics. But those tailwinds have now subsided.
That leaves Shopify in a challenging position in the short term.
Why it's still a buy
Sure, Shopify is facing headwinds, but what company isn't? The business has grown by leaps and bounds since its 2015 initial public offering. It had 609,000 merchants at the end of 2017, and that number had soared to 2,063,000 at the end of last year. That's about a 238% increase, and it's not an accident.
The size and scope of Shopify's services allow merchants to open online storefronts easily and for a relatively low price. The company's basic plan starts at $29 per month. It also caters to brick-and-mortar stores with services such as point-of-sales systems, marketing and inventory tools, and more. Businesses can seamlessly combine their online and offline sales operations into a single integrated system with Shopify.
Thanks to its valuable services, the company has become one of the biggest names in the e-commerce industry. In 2021, it accounted for 10.3% of e-commerce sales in the U.S. Only Amazon had a higher share of the market than Shopify, and the latter can continue to improve by investing in its business to serve its clients' needs better.
In July, Shopify closed its acquisition of Deliverr, an e-commerce fulfillment company, to bolster its own fulfillment network. It paid $2.1 billion in cash and stock for this acquisition. That's just one of the many initiatives it's taking to improve its clients' experience. And given the high switching costs associated with its offerings, the tech company should keep the bulk of its customers.
Shopify still has a massive addressable market, which it estimates at $160 billion. It generated $5 billion in revenue in the trailing-12-month period -- a minuscule portion of its addressable market. The company isn't the only player in this field and won't be the only one benefiting from it. Still, it is one of the leaders, an ideal position to be one of the primary beneficiaries.
That's why investors should not give up on Shopify, even if its stock drops further in the coming months. Those who buy the company's shares during this downturn could be glad they did in 10 years and beyond.
