The Motley Fool

Why Did Shopify (TSX:SHOP) Stock Plunge 25%?

Image source: Getty Images.

Shopify (TSX:SHOP)(NYSE:SHOP) stock has consistently been a huge winner. From 2016 to early 2020, shares moved from $35 to $700 — an increase of nearly 2,000%!

But that impressive performance doesn’t mean shares have gone on a straight line higher. Over the years, there have been plenty of dips. In every instance, the dip was a buying opportunity.

In recent weeks, Shopify stock has fallen by 25%. The coronavirus bear market is clearly to blame. As with historical pullbacks, this looks like a clear buying opportunity.

Capitalize on fear

Shopify isn’t trying to capitalize on a short-term growth opportunity. In fact, the company is positioned to benefit from a shift that could last another decade or two: digital retail.

You’re likely familiar with the biggest internet stock on the planet, Amazon.com. With a $1 trillion market cap, Amazon dominates digital retail. But importantly, it focuses on an aggregator model. You go to Amazon, search for a product, and see all of the items for sale in a single place.

But what about companies that want to control their own retail experience? Amazon dominates the market, but we’ve all made purchases online from other sites, often from the manufacturer directly.

Unless you want to cede your entire shopping experience to Amazon, these companies need to build their own website. Easier said than done. While there are some website builder tools available, retail businesses require much more than a pretty aesthetic. They need payment processing, inventory management, promotional capabilities, marketing tools, and much more.

Shopify noticed this gap in the market and created the first platform built specifically for independent retailers.

Today, the Shopify platform serves thousands of customers from Fortune 500 companies to scrappy entrepreneurs working out of their garage. The platform is that easy to use, and that powerful. You’ve likely shopped at a Shopify-powered site before without knowing it. That’s because the tools are completely customizable, even though they don’t need an engineering background to use.

Global e-commerce sales were $1.3 trillion in 2016, growing to $3.5 trillion in 2019. By 2023, digital retail sales are expected to surpass $6.5 trillion. This is an incredible opportunity for Shopify stock, especially since it takes a small cut of every item that is sold through its platform.

Shopify stock is still a winner

Over the last five years, Shopify has grown its sales by 70% per year. Sales are expected to continue rising by 40% or more per year over the next five years. The coronavirus bear market may put a small dent in that forecast, but long term, it’ll be just a small blip.

In fact, Shopify has the opportunity to grow stronger during the downturn. That’s because platform businesses gain steam over time.

Platforms like Shopify simply build the basic infrastructure, letting others build on top of it. Any developer worldwide can create a new capability on the Shopify platform and sell it to businesses that use Shopify to power their stores. This development makes the platform more enticing for potential businesses.

More business customers incentivizes new developers to build more capabilities, which incentivizes more customers, which again incentivizes more developers. It’s a powerful feedback loop.

“Once you attain platform status, it’s nearly impossible for others to catch up,” I wrote last month. “There’s a reason why app developers only focus on iOS and Android phones. The same goes for e-commerce. Shopify’s lead is already huge, and every day, the company’s competitive advantage strengthens.”

Shopify is built for the long term, and the recent dip is just another buying opportunity.

This Tiny TSX Stock Could Be the Next Shopify

One little-known Canadian IPO has doubled in value in a matter of months, and renowned Canadian stock picker Iain Butler sees a potential millionaire-maker in waiting...
Because he thinks this fast-growing company looks a lot like Shopify, a stock Iain officially recommended 3 years ago - before it skyrocketed by 1,211%!
Iain and his team just published a detailed report on this tiny TSX stock. Find out how you can access the NEXT Shopify today!

Click here to discover how!

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. David Gardner owns shares of Amazon. Tom Gardner owns shares of Shopify. The Motley Fool owns shares of and recommends Amazon, Shopify, and Shopify. Fool contributor Ryan Vanzo has no position in any stocks mentioned.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.