The recent wave of downgrades of Shopify (NYSE:SHOP) looks and feels unusual. Shopify stock has been one of the year’s biggest and best winners, and the newly-inked deal with Apple (NASDAQ:AAPL) will only open more doors.
If one takes a closer look at the accompanying commentary, however, you’ll see the fresh doubts from Wedbush, CIBC and Roth Capital aren’t aimed at the company itself. They were valuation-based concerns. Those analysts, even knowing the growth track the company is on, still fear the current price of Shopify stock is just too much.
It’s a realization that begs a follow-up question though: At what price does it make sense to wade back into Shop stock? The answer is less fundamental and more technical than many investors would prefer.
Analysts and Shopify Stock
“We recommend looking for another opportunity,” wrote CIBC analyst Todd Coupland a week ago when downgrading Shopify stock.
It sounds grim, but context is everything. Coupland prefaced that message by saying “at this point two years of our investment thesis and our upside have now been priced into the stock.”
He prefaced that with “We remain encouraged by these announcements and the longer-term potential with Shopify’s own fulfillment network.”
It’s a similarly-mixed message delivered by Wedbush’s Ygal Arounian, who pointed out, “while we view the announcements at Shopify Unite last week as further improving and differentiating the platform, the most impactful announcement, Shopify Fulfillment Network (SFN) isn’t expected to generate profits until 2023″ when downgrading SHOP stock earlier this week.
Arounian now rates Shopify shares at “Neutral,” while Coupland’s call is the same. Roth Capital feels the same.
It’s curious though… and telling. Even as Arounian was downgrading the stock, he upped his price target from $270 to $305.
The seemingly incongruous move isn’t unheard of. Ratings are based on the present value of a stock, while price targets are usually the perceived value twelve months into the future.
One doesn’t have to even read between the lines to recognize no analyst recently downgrading Shopify stock takes issue with how the company is waging its war with the likes of Amazon.com (NASDAQ:AMZN) and eBay (NASDAQ:EBAY). It’s strictly a valuation matter.
Finding a more palatable entry price, however, isn’t easy at this time.
Shopify Stock and Technicals
The challenge is simply the lack of historical context, girded by mostly-irrelevant fundamentals. In other words, special valuation allowances have to be made for a young high-growth company, and the chart’s parabolic since late last year leaves no previous high or low to act as a technical floor in the foreseeable future.
In such situations, there’s a tool that provides chart-based context when none seems to exist. Fibonacci retracement lines serve as the most likely landing points.
The quick explanation: Fibonacci numbers are a mathematical phenomenon that can be observed in nature, and mathematics, over and over again; they serve as the basis of a repeating pattern. You may have heard it called the ‘golden ratio.’
Their application to a stock chart is simple enough. That is, a retracement of a major move is likely to reverse by either 3/8 or 5/8 of that span.
For Shopify stock, the span in question is the move from December’s low near $117 to this month’s peak around $340. Assuming a 3/8 retracement, SHOP shares are destined to slide back to $255.
In fact, they’re halfway there already. The more plausible pullback from the recent high, however, is a full 5/8 retracement back to the $202 area where the pivotal 200-day moving average line will soon be.
Also note that the $202 area is a spot where the rally encountered a couple of weeks’ worth of turbulence.
Bottom Line for Shopify Stock
It’s just a theory, a framework for a trade when there’s little other framework to use.
Nevertheless, it’s a surprisingly powerful and effective framework. While there’s nothing mathematically magical about Fibonacci retracement lines, people are rather predictable.
They’re willing to let stocks slide by only so much before they draw a mental line in the sand. And, right or wrong, the 200-day moving average line as a line many investors watch, and use.
It’s not a terribly big coincidence the 5/8 retracement line is going to intercept the 200-day moving average line right around the time either could be tested.
Whatever the case, keep your eyes peeled for other reversal signals if-and-when Shopify shares test the aforementioned floors, and don’t sweat the earnings-based metrics too much. They really don’t mean a great deal just yet.
That’s a daunting selloff, but bear in mind it was also a wild rally. Even with such a dip, Shopify stock would still be at highs never seen until March of this year.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about him at his website jamesbrumley.com, or follow him on Twitter, at @jbrumley.