Shopify (STORE 0.64%) underperformed a falling market on Tuesday, trading down 7% at 12:45 p.m. ET from a 3.1% drop in the S&P500. The decline added to a difficult year for shareholders – the stock is now down almost 80% so far in 2022.
Tuesday’s decline was fueled largely by market-wide pessimism, but also by specific concerns about Shopify‘s growth prospects.
The Nasdaq Compound index, home to many tech players, was down 3.7% as of 1 p.m. ET, and Shopify tends to move in sympathy with this index, which includes peers like eBay and Amazon. All of these e-commerce specialists were down on Tuesday.
Investors were also concerned about the high level of inflation in August. A report on the consumer price index released on Tuesday showed it rose 8.3% last month, only slightly below July’s 8.5% rate. Persistently high inflation could lead the Federal Reserve to remain more aggressive in raising interest rates, increasing the risk of a recession. Shopify also cited inflation as one of the main reasons why its recent sales trends were so weak. “Persistent inflation at 40-year highs has dampened online sales around the world,” chief financial officer Amy Shapero said on a conference call in late July.
Inflation won’t just hit Shopify’s business, so worries about that headwind alone aren’t a good reason to sell the stock. The company has gained market share even as growth has slowed in the e-commerce niche, and continued gains on that front would mean strong returns for investors.
However, management forecast that before its earnings brighten from the end of 2022, its losses would increase in the current quarter. The prospect of more near-term losses, coupled with further weakening in demand trends, means Shopify stock is likely to fall when Wall Street worries more about a recession, as it did on Tuesday.
Conversely, when fears of a decline in demand fade, its share price could jump sharply. Investors should do their best to ignore these short-term swings and instead focus on the fundamentals that will drive Shopify’s returns over the next few years, including its market share and profitability trends.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Demitri Kalogeropoulos holds positions at Amazon and Shopify. The Motley Fool holds positions and recommends Amazon and Shopify. The Motley Fool recommends eBay and recommends the following options: Shopify January 2023 $1140 Long Call, Shopify January 2023 $1160 Short Call, and eBay October 2022 $50 Short Call. The Motley Fool has a disclosure policy.