Recession and Stock Markets

Investment Analysis Clubs Saul’s Investing Discussions
1

The issue of recession continues to come up on many of these threads. Recessions happen repeatedly. The stock market has gone through recessions repeatedly.

What happens generally in a recession is that pretender companies come back to reality, and the best companies increase their competitive advantages.

Companies with unsustainable multiples are crimped, and the best companies will rebound.

One can trade in and out, and if so, it does not really matter the quality and valuation of a stock.

If one wants to invest however, the value of an investment will go up and down and with a recession go way down at times. But the market will also recover before the recession ends. The market is forward looking. Usually seeing 6 months or so in advance.

The best companies will recover, the pretenders often will not.

So unless you plan on trading out at a recession and then buying back in, it is important to have quality long-term stocks.

The question to ask is whether or not SHOP’s business is real, quality, and lasting. Is SHOP building a franchise? Is SHOP building a franchise that will grow into its valuation even upon recovering from a recession?

Pretender companies get destroyed, and yo often see their valuations fall far more than you would ever expect as their pretend business is exposed.

SHOP certainly is not pretend. The issue is how valuable of a franchise they are building and will be building in the future. If solid, who cares. If not solid, but you like it because the share price has risen, then there is something to worry about.

Tinker

12 Likes
2

I’ve given this a fair amount of thought. Here’s the way I see it.

SHOP is not a “pretender.” But, a lot of their revenue is derived from what might be termed “pretender” or just weak, undercapitalized start-ups. Kind of a gentler way of saying “pretender.”

So what happens to SHOP during a recession. A whole lot of subscribers go out of business, that’s inevitable. How much does that impact the top line? I suppose you could dig into the financials, make a bunch of assumptions that may or may not be valid and come up with a number. Good luck with that.

How about the non-pretenders on the platform? They will probably survive, but their revenues will be impacted by a recession. Uh-oh, also not good for SHOP as an ever increasing portion of revenue comes from a percentage of sales by hosted companies. How much? Someone who is more adept at analyzing financials is welcome to take a shot at that one. For me the qualitative designator, “large” is sufficient.

So SHOP will be deeply impacted by a recession in my opinion.

But, I also believe that it doesn’t have to be fatal, it could be, but it doesn’t have to be. Toby has not yet shown his metal when it comes to a severe pullback in revenues. Has he the guts to layoff a lot of staff? Can he find ways to scale back capex? Might he postpone the expansion plans (if it happens in that timeframe)? Et cetera. Can he do what needs to be done with respect to cutting costs in order to survive?

SHOP has been on a spending binge. I’m fine with that. But we really don’t know how management will respond to a serious reversal. Are they proactive enough to have plans already in place? Are they already prepared for a recession? I know my former employer (cyclical aerospace company) planned their actions in advance for a recession. However, the 9/11 attack caught them completely off guard. It was only by swift executive action that they were able to successfully navigate that storm. I was one of the lay-off coordinators - the job that prompted me to leave management.

Reversals caused by external events can be brutal. I wish someone would ask during a conference call if they have planning in place now for the inevitable recession. In fact, I wish that was a standard question, but no one ever asks it.

So, we’re stuck with trusting that there’s some seasoned executives and board members with a loud enough voice to do the right things when a recession comes, as painful as they might be.

That which does not kill us, makes us stronger. This adage is ever so true for companies.

24 Likes
3

But we really don’t know how management will respond to a serious reversal.

True for many companies out there now! Great post and

Happy Balloon Day, brittlerock!

Pete

4

The following article discusses what the author feels would happen to Shopify during a recession. It is about five months old but no less relevant today than when it was written. It is well worth reading in my humble opinion.

https://seekingalpha.com/article/4079075-shopify-recession

Cheers Everyone!

1 Like
5

Aren’t most of Shopify’s merchants on Amazon or eBay? Can’t you look at how they did in the last recession? Facebook and instagram commerce may not have been a thing then but Amazon and eBay definitely were.
Ant

6

According to the article that was linked to on this thread, Amazon crashed 60% during the last recession. Of course the last recession was the worst recession since the recession of 1981-1983, so it was not a normal recession. The 1981-1983 recession was a forced recession by the Fed who had to squeeze out the excesses of the 1970s with interest rates as high as 21%, inflation double digit, which lead to double digit unemployment, but when it was done it has lead to probably the greatest and longest U.S. period of prosperity in history, with the stock market following along each time.

The 2008-2009 recession was of a different sort, caused by the excesses of mortgage lending. But even here, once we got through it, the market has continued to follow the path of prosperity as earnings continue to grow, and forward looking prospects continue to grow as well.

From this, worst case, 60% drop if Amazon is a model. But again, that was not a normal recession.

Tinker

1 Like
7

Hi Tinker - it’s an interesting analog from a SP point of view. Actually I was thinking about the underlying trading (revenues/profits) or Amazon during the recession rather than SP.
Ant

8

https://www.digitalcommerce360.com/2010/01/28/amazon-com-gro…

It appears that Amazon did spectacularly well in 2009. The recession was 2008-2009 was my memory. Annual figures are later in the article, the earlier figures are for the quarter.

And shockingly! Amazon did even better in 2010:

https://www.digitalcommerce360.com/2011/01/27/amazon-sales-a…

So regardless of what the stock may have done, the underlying business was spectacular even during the great recession.

Tinker

3 Likes
9

I think this may be what I call/have just created the ‘fallacy of unchanging multiples’ (FUM). FUM is much liked and promulgated by those who have an interest in the market going up (including TMF).

Multiples still reflect our strange and extraordinary times: a madly profligate rake’s progress of money-printing and low interest rates, both completely artificially extended far too long and the resulting asset-inflation. There has also been a strange veneration of central bankers (I am coming to think that some part of the human brain, unchanged from the savannah, needs gurus and soothsayers even when they are repeatedly shown to be incompetent!). While all this went on, year after year, multiples naturally grew and a great deal of fun was had by all. Well, all with assets anyway. FUM postulates that this process will not go into reverse when policy is reversed.

Hmmm. Er, why would it not?

The assumption that market multiples will rebound to the same level (‘the market always bounces back’) is based on FUM.

The market will certainly recover and continue its progress! I am not sure that will be the case for many investors who have put a fashionable multiple on sales and expect it automatically to be regained, as of right.

8 Likes
10

How about the non-pretenders on the platform? They will probably survive, but their revenues will be impacted by a recession. Uh-oh, also not good for SHOP as an ever increasing portion of revenue comes from a percentage of sales by hosted companies. How much? Someone who is more adept at analyzing financials is welcome to take a shot at that one. For me the qualitative designator, “large” is sufficient.

So SHOP will be deeply impacted by a recession in my opinion.

SHOP has been growing revenue by 70+%. A large part of the reason is the wave of companies that are moving from brick and mortar to online. I think it would be a reasonable guess to say that many of the companies that are joining SHOP are not new companies but companies that have existed and are now joining SHOP as a means to facilitate a channel pivot. So when a recession hits, how will SHOP be impacted? Will a recession stop or significantly slow the wave of companies that are moving to online commerce? I would say no. How bad would it be if SHOP’s revenue growth slowed from 70% to 50% or 40% growth? I don’t think it would be very bad for SHOP’s operations. The stock would probably take a hit but recessions usually only last a few quarters.

Chris

3 Likes
11

recessions usually only last a few quarters.

A key consideration. I was envisioning a rather deep and lengthy recession as I wrote my post. I should have been explicit about that. If it is a shallow recession or even if deep, short-lived, I agree with you. It takes a while for even a poorly run business to cease operations. Most business owners protect their venture like a child. Many on-the-edge operations might survive if the recession doesn’t last too long.