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Motley Fool Issues Rare “All In” Buy Alert
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If one thing has characterized 2022 for investors, it’s been the bear market, which marks the worst downturn for Wall Street in more than a decade. The Nasdaq Composite is currently down 31% over the past year, with many stocks falling much further.
If there’s been any good news to emerge from this painful period, it’s that many high-quality companies — which historically rebound quickly once the carnage is over — are selling at multi-year lows. This gives patient investors the opportunity to profit from the short-term fear that currently grips Wall Street.
One stock that has been driven down by the prevailing market headwinds is e-commerce platform Shopify (SHOP 0.05%). The stock has fallen 79% over the past year, and some investors have largely written off the company on fears that the best days of online retail are in the rearview mirror. Let’s take a look at the evidence to see what it reveals.
Image source: Getty Images.
There’s simply no way to have a discussion about Shopify without talking about the elephant in the room — the decelerating growth of e-commerce. Following a robust growth spurt that accompanied the early days of the pandemic, the adoption of online retail appears to have slowed to a crawl. What’s actually happening, however, is that it’s merely reverting to more normalized growth. Some fair-weather investors, who have never experienced a major stock downturn, ran for the exits at the first signs of turmoil.
Shopify’s results so far this year seemed to confirm investors’ worst fears. For the nine months ended Sept. 30, revenue grew just 20% year over year, a far cry from the 86% growth the company generated in 2020. Taking a step back, however, reveals a three-year compound annual growth rate (CAGR) of 52%, much nearer to historical averages.
It’s also important to view that year-over-year decelerating growth in the context of the current conditions. The U.S. is in the midst of a bear market and the worst economic downturn in more than a decade, facing a combination of near-40-year-high inflation and steadily rising interest rates. The environment has spooked consumers, who have begun to rein in spending to deal with the ongoing economic storm. Not to make light of the current conditions, but history shows that “this too shall pass.”
E-commerce growth may be stagnant now, but when the economic recovery comes, it will bring with it a commensurate rise in consumer spending. Not only that, but the worldwide e-commerce market is expected to grow from $3.3 trillion in 2022 to $5.4 trillion in 2026, accounting for 27% of all retail, according to estimates compiled by Morgan Stanley.
Shopify is the industry leader, and while estimates vary, the company powered roughly one-third of all e-commerce websites in the U.S. in 2021 and about 10% of all gross merchandise volume (GMV) — behind only Amazon. This suggests the company is well-positioned to capture the coming rebound in consumer spending and the continuing proliferation of digital retail.
As the leading provider of software-as-a-service (SaaS) tools for online sellers, Shopify carved out a lucrative and profitable niche for itself — that is, until recently. The company swung from a profit to a loss so far this year, hampered by foreign currency headwinds and hamstrung by a rapid headcount expansion and strategic bets made early in the pandemic.
Shopify addressed its missteps earlier this year by reducing its workforce, laying off a total of 10% of its staff. The company also embarked on a reorganization, working diligently to reduce spending and find cost efficiencies that will pay dividends over the long term.
Given the state of the market and the fragility of the economy, I’m not saying that Shopify stock won’t fall further, because the macro conditions will presumably get worse before they get better.
Furthermore, Shopify is not now — nor has it ever been — cheap in terms of traditional valuation metrics, even after its recent drubbing. That said, the stock currently trades for roughly 7 times next year’s sales, its lowest valuation ever. While Wall Street generally recommends stocks with a price-to-sales ratio between 1 and 2, investors have historically awarded a premium valuation to growth stocks — particularly those that can leverage their existing technology and scale to accommodate new users. Despite its issues over the past year, Shopify still meets these lofty criteria.
The company’s industry-leading position, massive addressable market, and historically low valuation make Shopify a stock I’d buy right now, without any hesitation.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Daniel Vena has positions in Amazon and Shopify and has the following options: long January 2023 $114 calls on Shopify and long January 2023 $116 calls on Shopify. The Motley Fool has positions in and recommends Amazon and Shopify. The Motley Fool recommends the following options: long January 2023 $1,140 calls on Shopify and short January 2023 $1,160 calls on Shopify. The Motley Fool has a disclosure policy.
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