After nearly touching $600 per share just a few weeks ago, Shopify (NYSE:SHOP) has lost almost half its value in the market crash. Shopify stock is down to $316 this week as investors continue to wonder how much more pain the coronavirus from China will inflict on Wall Street.
Is Shopify just another casualty in the stock market’s race to the bottom, or is the firm in danger of falling apart amid the economic strain? Here’s a look at whether or not Shopify stock is a buying opportunity in today’s market.
Shopify’s Business Risk
There’s no denying that most businesses across the globe are exposed to the risk of economic turmoil that coronavirus poses. Shopify is no different — more specifically, the small to medium sized businesses that use Shopify to oversee their e-commerce operations are at risk. Shopify was riding the growing wave of online shopping alongside an army of small sellers who wanted more control over their online storefronts.
That offered a huge avenue of growth for Shopify, as more and more small businesses looked for ways to bring their operations online. However, as social distancing and isolation become more common across the globe, small businesses are suffering.
That’s problematic for Shopify, as it relies on those businesses to continue paying subscription fees.
Another issue investors should consider is the fact that Shopify is a growth stock, meaning investors have been willing to pay for future growth and overlook profitability. That’s all well and good in times of economic prosperity, but companies like Shopify that aren’t financially sound can’t withstand an economic downturn as well as their better-established peers.
Shopify’s cashflow per share comes in at -$0.79, suggesting the firm’s financial strength to get through a prolonged period of uncertainty is questionable.
The Upside for Shopify
On the other hand, there’s a lot to like about Shopify at times like these. There’s no doubt that belt-tightening will see business services eliminated from quite a few budgets. Those that are critical to operations will be the safest and Shopify falls into that category.
As an e-commerce platform, Shopify connects businesses with customers. Before coronavirus forced people to stay in their homes? Online shopping was booming. Now, online shopping is the only hope for business that many vendors have.
Plus, Shopify has become more than just an e-commerce platform. The firm also manages a host of critical business functions and allows vendors to see a snapshot of their entire operations in one place. For that reason, Shopify likely falls very near the end of potential budget cuts.
Cautiously Optimistic on Shopify Stock
While the coronavirus isn’t all bad for Shopify stock, it certainly presents some risks moving forward. Much of whether you believe Shopify is a good pick at its current valuation depends on how much worse you expect the coronavirus’ impact to get.
Continued suppression of economic activity could see Shopify lose a huge proportion of its customers. In that scenario, Shopify doesn’t have the financial security to temper the losses. However, if things do start to get so bad that small businesses are shutting up shop across the board, we’ve got bigger problems. In that case, banks would also be at risk of collapse.
Shopify will likely feel the pain of the coronavirus containment strategy’s economic impact, but as retail stocks go, it’s in a good position to survive as it represents a critical part of business operations.
The Bottom Line on Shopify Stock
The market is unlikely to make its way back to its former highs overnight, but the most likely scenario is still a widespread recovery once coronavirus worries have faded. Shopify is likely to be included in that recovery, and could even outperform when it comes time to report.
With that in mind, Shopify stock is worth adding to your watchlist. I wouldn’t advise pouring your lifesavings into Shopify, or any stock right now for that matter, because we’re likely to see more wild swings over the next few weeks. But as discounted stocks go, Shopify looks like a long-term winner that’s worth considering once the market, and the economy, start to recover.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.