When Citron Research founder Andrew Left called Shopify Inc (US) (NYSE:SHOP) a “get-rich-quick scheme” and dirtier than Herbalife LTD. (NYSE:HLF), investors sold off Shopify stock in droves. In less than a month, SHOP tumbled from $122 to $92, and many analysts think there’s much further for SHOP to fall. But that all depends on the chart.
Shopify Stock at a Technical Crossroads
After shaking off its early-October downward spiral, SHOP made it as high as $109 by Halloween. But that turned out to be a false start, as the stock slumped back to $96. It hasn’t dipped lower than $96 in the two weeks since, and it is actually showing signs of life back above $100.
From a technical perspective, SHOP appears to be building a solid-looking base. If the break is to the downside, the magic number is $92 — its October low, and the lowest the stock has been since early August. If that support level disintegrates, then Citron’s decision to short-sell SHOP could have a long- to intermediate-term impact.
Until then, the stock is at a crossroads, and one could view it as a falling knife or a prime buying opportunity, depending on what you think of Shopify. And as a company, it still has a lot going for it. During the latest round of Shopify earnings, the company beat top-line estimates for a 10th consecutive quarter. Gross merchandise volume grew by 69%, though that was down from 74% year-over-year growth in the previous quarter. And the company raised its full-year outlook, and expects a strong fourth quarter.
Shopify is not yet profitable, though the company expects to push ever-so-slightly into the black starting in the current quarter. Like Citron said, Shopify is unlikely to sustain its 70% to 80% sales growth; analysts anticipate 59% sales growth in the fourth quarter, and just 33% sales growth next year. So, at some point a slowdown in Shopify stock was inevitable.
In my mind, that slowdown has already occurred. A 25% pullback in one month, in this bull market, qualifies as a legitimate correction. SHOP stock is steadily inching back toward its 50-day moving average, which is currently in the $106 range. If it gets there, I’d expect a full recovery back to its September highs in rather short succession.
Short-Sell a Long-Term Boon for Shopify Stock
Longer term, some of Citron’s gripes are certainly legitimate. When you’re an online marketplace for small retailers, many of its clients will ultimately fail. But in a retail environment that is shifting more and more online by the day, many of Shopify’s clients will succeed — or enough to keep the company growing at a healthy rate. From a 10,000-foot view, Shopify’s business model is the right idea at the right time.
No stock rises in a straight line without interruption. After tripling in 10 months, with no profits, Shopify stock was due for a correction. Citron’s hatchet job not only triggered the correction, but made it steeper and quicker than it otherwise would have been. In that regard, I think Citron created a prime buying opportunity in a stock with plenty of long-term potential. Unless it dips below that $92 threshold I mentioned earlier, I’d buy Shopify stock now before it reaches that 50-day moving average and really starts to take off.
As of this writing, Chris Fraley did not hold a position in any of the aforementioned securities.
