Shopify Inc Puts the Squeeze Play on Short Sellers

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Shopify stock - Shopify Inc Puts the Squeeze Play on Short Sellers

Source: Shopify via Flickr

One of the noblest ways to respond to a challenge is to stick to your guns and keep doing what you do best. Last year, Citron Research called out Shopify Inc (NASDAQ:SHOP) for “shady” business practices and extreme valuation concerns. Shopify ignored the short-seller’s commentary and continued business as usual, and it has made all the difference.

Few stocks are enjoying 2018 so far. Even the S&P 500 Index is up a mere 1% on the year … an achievement considering February’s market correction. Yet, Shopify stock has added a whopping 31% year-to-date in 2018. SHOP owes its gains to a surging e-commerce market that did amazingly well this past holiday season.

Shopify Stock
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 In the modern retail world, you cannot hope to be competitive if you don’t have an online presence. And Shopify has seen its revenue grow by leaps and bounds providing such services to small and medium-sized companies — i.e., those left behind by the likes of Amazon.com’s (NASDAQ:AMZN) Amazon Web Services and similar large-scale operations.

So, what about Citron’s concerns? InvestorPlace’s Vince Martin recently wrote an excellent piece dissecting Citron’s arguments. His conclusion boiled down to Shopify’s continued growth; 71% in the most recent quarter to be precise.

Not since Alibaba Group Holding Ltd (NYSE:BABA) have we seen this kind of quarter-over-quarter growth in the retail sector.

Comparing Alibaba and Shopify may seem like a bit of a stretch, but Shopify’s platform right now is very similar to where the Chinese e-commerce juggernaut was at a similar stage in its development.

First and foremost, Alibaba enables small to medium-sized Chinese businesses to sell their wares online, reaching a global audience. While Shopify takes a different approach to the problem, it targets a similar market with similar results.

The problem for investing in Shopify or trading SHOP stock is valuation. The shares are fresh off all-time highs near $146, with Shopify stock trading nearer to $132-$133 at last check. Wall Street analysts have a 12-month price target of $144.65, leaving very little wiggle room for upward mobility.

That said, with analysts still digesting Shopify’s impressive quarterly results, a price target bump or two isn’t out of the question. Additionally, there is also room for upgrades, with Thomson/First Call reporting that 12 of the 29 analysts following SHOP still maintaining a “hold” or worse rating.

Furthermore, Shopify bears are still unwinding their positions after reeling from the stock’s year-to-date rally. Short interest fell 17% in the most recent reporting period. However, more than 22% of Shopify’s total float remains sold short. If SHOP stock holds firm near technical support near $130, we could see more short sellers cut their losses and begin buying back shares.

In the options pits, Shopify stock bulls are firmly in control. For example, the March put/call open interest ratio rests at 0.47, with calls more than doubling puts among front-month options.

Volatility remains a concern, however. March implieds are pricing in a potential move of more than 9% heading into expiration. As a result, the upper bound lies near $148 and the lower bound at $123.

2 Trades for Shopify Stock

Call Spread: Traders looking to bet bullish on Shopify stock might want to consider a March $140/$142 bull call spread. At last check, this spread was offered at 34 cents, or $34 per pair of contracts. Breakeven lies at $140.34, while a maximum profit of $1.66, or $166 per pair of contracts — a potential return of 388% — is possible if SHOP stock closes at or above $142 when March options expire.

Put Sell: If you’re looking for a more conservative trade, then a March $125 put sell might be a way to capitalize on technical support. At last check, this put was bid at $2.75, or $275 per contract.

As always, you keep the premium received as long as Shopify stock closes above $125 when March options expire. The downside is that should AAPL trade below $125 ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $125 per share.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2018/02/shopify-inc-puts-the-squeeze-play-on-short-sellers/.

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