The S&P 500 fell 10% in 10 days? If your only holding was Shopify Inc (US) (NYSE:SHOP) — or perhaps Netflix, Inc. (NASDAQ:NFLX) — you may not have even noticed the pullback. Shopify stock hit new 52-week highs earlier this week, briefly rallying over $145.
However, SHOP stock price wasn’t able to sustain the run, falling to about $135 a day later on Wednesday.
What do we make of the stock and is it a buy?
For traders, Shopify stock is actually setting up pretty attractively on the chart. There are still caution flags for long-term investors, however. While customers swear by the Shopify product and model (and I personally don’t have any beef with it), there are some serious valuation concerns here — there always have been really.
Even for long-term investors though, there are some risk-reward scenarios that may make SHOP stock a reasonable buy. Let’s look at the setups.
Trading SHOP Stock Price
The recent rally has been great for those that were able to catch it. In mid-December with SHOP stock price near $105, we said it could run to $125 if it gets through $110 resistance. It did more than that, surpassing the target by a good $20 per share. The rally of almost 40% only took six weeks to generate, but it’s left us with another good setup.
Click to Enlarge
The $125 level (purple line) was our previous target and it was also an important level of resistance. Shopify stock was able to push through this ceiling in January, however. And despite some strong selling pressure in early February, this level largely held up as support. Short of another large market-wide correction, $125 should again act as support.
Short-term traders will want to buy SHOP stock if it corrects down to this level, which is about $10 per share below current levels. If this scenario plays out and $125 holds as support, it will setup Shopify stock to retest its highs near $145.
But what about longer term investors? For those that like Shopify for the long term, they too should consider buying near $125.
However, unlike the trader, investors should only take a partial position in the name. Should SHOP stock continue pulling back, I would buy again near $110. This level has several levels of support, starting with trend-line support (in black). Second, the 100-day and 200-day moving averages are near $110. These should also act as support.
While it wouldn’t be pretty, a significant close below this second level of support could be used as investors’ stop-loss. Those buying SHOP as an investment should know it’s a volatile stock and isn’t for everyone.
Valuing Shopify Stock
Another positive? Shopify already reported earnings on February 15th.
Aside from beating on earnings and revenue expectations, the company had a lot of other good results too. Gross merchandise volume jumped 65% year-over-year, while subscription revenue soared 67%. Both first-quarter and full-year revenue guidance topped analysts’ forecasts.
The results were good — very good actually. And while earnings were a catalyst to a higher stock price, I’m more glad to have them out of the way as a possible risk. However, another risk has reared its head in the form of an equity offering. The company is selling 4.8 million shares at $137, $2 per share above current prices.
Will shares hold up? This extra supply of stock could certainly weigh on Shopify stock. Perhaps it will even drive it down to some of the levels we’re looking to buy at. But it all depends on how the market ultimately reacts to it. So far, the move is not being seen in positive light. With SHOP stock price up so much over the past year though, who can blame them?
With or without the equity raise this is an expensive stock. On a GAAP basis, SHOP will lose money in 2018, while analysts are looking for 47% sales growth. Shares trade at ~20 times its trailing 12 months of sales though, which is quite high. In fact, SHOP stock is expensive on seemingly every metric.
I don’t love the dilution or the valuation, but from a trading perspective the same plans laid out above still apply.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
