Between late 2021 and mid-2022, Shopify (SHOP 0.65%) suffered its most significant decline in the stock's history. Despite its 10-for-1 stock split, a brutal bear market and a slowdown in e-commerce led to massive selling of the stock.

Nonetheless, the e-commerce industry has a history of recovering from worse shocks, namely Amazon's recovery from a 90%+ drop in the dot-com bust. Given Shopify's continuing growth and widening competitive advantage, 2023 could mark the beginning of a likely recovery for the tech stock.

Growth under difficult conditions

Admittedly, 2022 is a year the e-commerce industry would like to forget. As consumers emerged from the lockdowns over the past couple of years, much of the pandemic-driven gains reversed, and sales growth either slowed or reversed outright.

Shopify peaked at an intra-day, split-adjusted high of $176 per share in November 2021. Just 13 months later, it sells for around $36 per share, a drop of nearly 78%.

That decline has taken the price-to-sales (P/S) ratio down to 9. Even though that is down from a P/S ratio above 60 in less than two years, it may offer little comfort to downtrodden investors.

But while the drop has devastated some Shopify shareholders, it has not taken Shopify out of growth mode. In the first nine months of 2022, revenue came in at $3.9 billion, 20% more than in the same period last year. Though that is down from the 57% increase in 2021, growth remains positive.

Instead, the more significant pain likely comes from the $2.8 billion loss Shopify reported in the first three quarters of 2022, a massive reversal from the $3.3 billion in the same time frame in 2021. A 69% increase in operating expenses resulted in large part from costs related to the acquisition of fulfillment technology company Deliverr, a deal that closed in the third quarter. The company also suffered $2.4 billion in investment losses over the period, a stark contrast to the more than $3 billion in investment gains in the first nine months of 2021.

Transcending the competition

But despite that disappointment, Shopify offers hope for the future. Shopify defines its total addressable market as "anyone who wants to make more money from their site than they pay for it." As of last summer, Shopify estimates that translated into a $160 billion total addressable market.

So far, it has only captured a small fraction of that market. If measured against the trailing 12-month figure, about $5.2 billion, that amounts to approximately 3% of what it believes it can capture.

Also, according to BuiltWith, Shopify is the No. 1 e-commerce platform in the U.S., which accounts for approximately two-thirds of Shopify's sales. Worldwide, it is No. 2, lagging only WordPress' e-commerce plug-in, WooCommerce.

Nonetheless, Shopify has one key advantage over WooCommerce and most of its peers -- it does not limit itself to software. Shopify has built an ecosystem that offers added features such as fintech, access to capital, and inventory management, even for products sold outside of its platform.

It has also ventured into fulfillment through the Shopify Fulfillment Network (SFN) and the aforementioned purchase of Deliverr. Although that is a capital-intensive, low-margin business, the need for such a service will probably induce some e-commerce operations to choose Shopify over its competitors.

Shopify in 2023

Amid a bear market, Shopify has shown it can maintain slower but positive revenue growth. Admittedly, the losses likely disappointed investors as the bear market devastated Shopify.

However, the situation calls for some perspective. Its revenue growth has not stopped, and many of the losses stem from Shopify's efforts to improve its fulfillment network. That should boost profitability as Shopify covers more of its addressable market. That growth and the nearly 80% discount in the stock price could help make 2023 a better year for Shopify.