There's no denying that fear has been an integral factor driving many of the market's movements in past months. From fears about an impending potential recession, to the rampant inflation affecting companies' profitability across a range of sectors, to larger macro trends, the stark fluctuations in investor sentiment have resulted in tremendous volatility for many investors.
However, a down market can present untold opportunity for the shrewd investor with capital to spare and the appropriate investing horizon. If you have money to put to work in the stock market this month and are looking for discounted stocks to add to your buy list and hold for five years or longer, here are two compelling businesses that fit that bill.
1. Etsy
Etsy (ETSY 0.34%) is trading up by about 23% since the beginning of 2023, but is still trading down by 10% from one year ago. Even amid worries about how consumer spending could shift if a recession officially hits, and even as people have already pulled back on spending in certain areas, the e-commerce platform is still recording remarkable growth from pre-pandemic levels.
That's not to say that a recession couldn't temporarily dampen growth, but there are a few key tailwinds Etsy can rely on to drive meaningful business and shareholder returns in the years ahead. For one, it's important to recognize that while e-commerce spending may fluctuate in the coming quarters as consumers may be more hesitant to part with hard-earned cash, the flow of online spending is only expected to grow.
Online retail spending hit a whopping $905 billion in 2022 alone, and that was just in the U.S. Etsy's position as a leading e-commerce platform with a focus on unique, specialty, and handmade items that are unlikely to be found anywhere else can make it a key beneficiary of this overall trajectory -- both in the U.S. where much of its seller base is, and from its growing presence in international markets.
The specific focus of Etsy's platform is also a robust tailwind here. While there are other platforms that sell handmade or vintage items, few have narrowed their focus to these categories alone. Etsy has done so at a scale that handily outpaces its direct competitors. Management estimates that Etsy.com alone -- not including other platforms in its family of brands, like Depop or Reverb -- has a total addressable online market of around $470 billion, only about 3% of which Etsy has penetrated to date.
Meanwhile, Etsy is continuing to witness remarkable growth on a multitude of fronts compared to the pre-pandemic era. That's arguably a much more meaningful measurement of its overall long-term growth trajectory than comparisons to heightened windows of spending during the peak of the pandemic. Not only were gross merchandise sales in the third quarter of 2022 up 150% compared to the same stretch in 2019, but revenue was up 200% on a three-year basis. Etsy's active seller and active buyer count at the end of Q3 2022 represented respective increases of 185% and 110% from the same quarter in 2019.
Etsy continues to capitalize on ways to attract more sellers and buyers, such as upgrades to Etsy ads, which management has identified as being " a significant driver of Services revenue growth," and its recently launched Purchase Protection program. For investors who intend to buy and hold this stock for the long haul, the long-term growth of the e-commerce industry and Etsy's large untapped market opportunity within this space could create a golden buying opportunity in the current market.
2. Shopify
Shopify (SHOP 1.11%) is currently trading up by about 50% from the beginning of the year, while still trading approximately 40% down from one year ago. The market's broader sentiment toward growth stocks has been a notable driver of Shopify's share price fluctuations over the past year. But the business itself still holds tremendous promise that may be particularly tempting for long-term investors searching for bargain buys in the current market environment.
As an investor in Shopify, I too have felt the pain the growth stock bear market has inflicted on shares in past months. In particular, Shopify's move back into unprofitability has worried many investors. However, it's always important to look beyond numbers, into the broader factors driving these results. It's also prudent to never base a buy or sell thesis about a stock on the foundation of a few quarters alone.
There are a few different reasons Shopify has drifted back into unprofitability in the past few quarters. One has been an increase in stock-based compensation. In addition, many of the company's equity investments have been affected by the volatility afflicting the broader market. Finally, and this is key, Shopify has been aggressively investing in building out its business to set itself up for competitive success in the future. While these moves could mean that it remains unprofitable for the next few quarters, Shopify appears to be building an incredibly strong foundation upon which it can sustain future long-term returns.
Shopify is currently working to integrate e-commerce fulfillment company Deliverr, which it acquired last summer, with its existing fulfillment network. The goal is to create a seamless fulfillment environment for merchants that makes it easier than ever to complete the entire customer process, from placing the order to getting it delivered to their door. Shopify's ability to achieve greater control over its fulfillment network is vital for it to remain competitive and continue attracting more merchants to its platform, which in turn will attract more customers. As of Q3 2022, management had already seen more than 80% growth on a sequential basis in the merchants using more than one of its logistics services.
President Harley Finkelstein noted in the Q3 earnings call: "We plan on becoming profitable again. We said this year was an investment year, but this is a company that thinks deeply about managing expenses, growing revenue." He added: "But ultimately, this is a company that likes to be profitable, and we will get back there." While revenue growth has decelerated from pandemic highs, its Q3 revenue represented an increase of 260% compared to the same quarter in 2019. The company shaved its net loss from $1.2 billion in the second quarter to $158 million in the third.
No investment is risk-free, but Shopify's position as one of the leading providers of software and hardware to help business owners launch, maintain, and grow a brand mean that it's well situated to capitalize on the e-commerce industry's continued growth and recovery of overall consumer spend. Patient investors who buy in now can capitalize on this growth story later.
