Is it time to shop for a pop in Shopify (NYSE:SHOP) stock? Let’s look at what’s happening off and on the SHOP stock price chart and see if shares are ready for a risk-adjusted purchase, or maybe the wish list shopping cart instead. Let me explain.
Buying on weakness in the stock market is a proven strategy. And there’s little doubt SHOP stock has settled into just that sort of opportunity. In recent weeks shares of the e-commerce solutions platform shed as much as 30% from its late August all-time high. And SHOP is still off 25%. Moreover, buying after a correction the size of Shopify’s is a popular approach among savvy growth investors recognizing even the best stocks can fall temporarily out-of-favor.
The fact is even the market’s largest companies from Microsoft (NASDAQ:MSFT) to Costco (NASDAQ:COST) or Apple (NASDAQ:AAPL) and Home Depot (NYSE:HD) have all suffered this type of unavoidable behavior at one time or another en route to enriching their shareholders. So SHOP stock is a buy, right?
Shopify does maintain its share of favorable supports backing a purchase right now. Aside from buying SHOP at a healthy discount from recent highs, shares are also more than 10% below last quarter’s bullish earnings reaction. At the same time, analysts fully expect another quarter of solid growth when the company reports next Wednesday night.
Still, Shopify isn’t perfect and investors should be prepared for volatility.
For one, as Shopify has grown its e-commerce business competition continues to heat up. And among those challengers is the market’s 800-pound gorilla Amazon (NASDAQ:AMZN). SHOP also relies heavily on merchants that source their goods from China and use a drop shipping model. Neither is good for Shopify if the trade war wages on.
Shopify stock’s valuation isn’t cheap either. Even for those that can see the company’s long-term potential like InvestorPlace’s Ian Bezek, buying SHOP is a difficult proposition. And with a forward price multiple of 325x earnings, 27x sales, lighter revenue growth trends and only modest cash flow generation coming out of SHOP, some of that concern is understandable.
SHOP Stock Price Weekly Chart
As the provided and well-illustrated weekly chart shows, SHOP stock has done a lot of things technically pleasing on the way up over the last couple years. And aside from the picture perfect correction of 30%, shares continue to act constructively as Shopify tries to establish a bullish double bottom pattern.
If you think I’m bullish, you’re correct. Despite some of SHOP’s valuation concerns, the fact is it’s also not unusual for a growth stock of Shopify’s caliber to look and remain expensive as shares enjoy their largest and fastest gains in their momentum phase. Bottom-line, Wall Street isn’t known for its RSVPs. But I’m also not a buyer of Shopify stock right here.
SHOP Stock Buy Strategy: I’d recommend investors wait for weekly price confirmation of the pattern bottom, as well as a clear sign Shopify’s stochastics are turning bullishly up inside oversold territory before buying shares. Should SHOP stock accommodate our wishes in front of earnings I would highly stress the use of an options hedge to protect the stock purchase or a limited-risk bull call spread for positioning.
Investment accounts under Christopher Tyler’s management do not currently own positions in securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits