At the end of July, Shopify (NYSE:SHOP) reported its fiscal second-quarter results. The company beat on both earnings-per-share and revenue expectations, turning a surprise profit in the process. However, it wasn’t enough to propel SHOP stock back to its prior highs.
The price action has been interesting in SHOP stock. Shares fell from roughly $173 to about $147 or about 15% in a two-day stretch leading up to earnings. SHOP stock then fell almost $10 — more than 6% — following earnings. It has been erratic since and Shopify is now teetering on the same post-earnings levels.
So what should investors do?
Trading SHOP Stock
Handling a volatile name like Shopify can be difficult. When timed correctly, it can make investors a boatload of money. When on the wrong side of the trade though, Shop can quickly lead to steep losses. That fact is highlighted by its pre-earnings decline.
Now though, we’re quite close to the 200-day moving average. An overshoot down to $128 will get us to the all-important 61.8% Fibonacci retracement level. Aggressive bulls could buy on a test-and-hold of the 200-day, while conservative bulls may want to wait for a test of the 61.8% Fib.
On the chart below, the 200-day is somewhat difficult to see, as a low uptrend line runs through $132 as well. That adds to the bull case should we get a slightly deeper correction in SHOP stock. Should support fail, a decline to the $115 level is possible, particularly if there’s broad-market weakness as well.
Valuing SHOP Stock
The thing about Shopify? It has never been a cheap name to own. As a result, shares tend to trade on momentum — when there’s momentum in the business, there’s momentum in the stock price.
Last quarter was mixed and as a result, the price action has been mixed as well. The plus side? Revenue of $245 million soared 62% year-over-year, while earnings of 2-cents-per-share came in 5 cents ahead of expectations. Subscription revenue jumped 55% YoY and merchant solutions revenue climbed 68%.
Further, guidance came in strong, with management forecasting third-quarter revenue between $253 million and $257 million. Consensus expectations were looking for just $253 million. Full-year revenue was a similar situation, with management looking for $1.02 billion to $1.03 billion vs. expectations of $1.02 billion.
It’s promising to see SHOP stock (likely) hitting the $1 billion mark in sales this year. On the downside though, gross merchandise value (GMV) growth fell to 56% from 64% in the same period a year ago and a sequential decline in gross margin. Further, the company filed for a mixed securities offering of $5 billion over the next 25 months.
Bottom Line on SHOP Stock
Provided management doesn’t dump the entire $5 billion offering in the next few months (unlikely), I believe the quarter was more good than bad. Additionally, valuation is not much of a consideration for the stock. Let’s not forget, this isn’t Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT) or Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL). This is a pure-play on momentum.
Business is going well but did show some bumps in the road. If shares hold up where they’re supposed to, we should see a bounce and buyers at least have a well-defined risk/reward. Should we get a rebound, the average analyst price target over the last three months is near $160, which represents about 16% upside.
To get there though, SHOP will need to push through the 50-day and 100-day moving averages, as well as various Fib levels. We need to move with baby steps and holding support is step one. Let’s see how it does near the 200-day.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, he was long AAPL.
