Shopify (NYSE:SHOP) stock is a wild one. Trading it is not for the faint of heart. If you are waiting for an easy entry point, you are going to be waiting a long time. The speed at which the shares move baffles most investors. Therefore it is much easier to invest in it with a particular thesis then try to trade it, unless you know the charts well.
So get ready for a discussion of levels to guide us through the price action.
Looking back at the last three days, SHOP stock was as high as $666 and as low as $560 per share. At yesterday’s close, it was just above the middle, so clearly investors are undecided about it here.
The traders that are technically savvy have a lot of opportunities to scalp big profits intraday in both directions. Zooming out to slightly longer term perspective, buying it at these altitudes is counter-intuitive. It seems like it’s too high and that it ran too far already. While that may be true, the recent dip on April 21 down to $550 per share may have established a tradable bottom.
The drop was so sharp that ownership of the stock may have transferred into the hands of better-conviction investors. Those who had missed the breakout in mid-April bought that dip and are now happy with their 10% profits.
Nevertheless, fundamentally the stock is nauseating at these altitudes because it sells at 452 times its yearly sales. This is not me saying short it because I believe in the concept they are building. In December I wrote about SHOP stock continuing to rally into 2020 and here it is $250 higher.
SHOP Stock Is Expensive But That’s Not a Reason to Short It
I understand that this is a growth stock and that cheap isn’t a metric I need. But then I remember Amazon (NASDAQ:AMZN) has a price-sales ratio under 5.
Recently, management commented that every day is like a Black Friday, putting the stock buying frenzy into high gear. The fact remains that online marketplaces like Amazon and Shopify are busier than they’ve ever been. Even when the quarantine ends, some of these habits will stick. Some people may have shopped online for the first time because of this crisis, and they may continue doing after it ends because it is convenient and sometimes cheaper.
The exuberance seems piggish yet warranted, but then the question of time remains. The investor timeframe is all that matters here. Some who want to own Shopify for the very-long term would ignore the fact that it rallied so far so fast.
I personally like that concept of owning it with conviction, but I would much rather enter at a lower price point. Ideally I would wait for SHOP to be closer to $500 than $650 per share. I may not get the chance soon, but I’m willing to wait. Meanwhile I also do not stubbornly short the stock with conviction, because this is the kind of company that could punish the bears — like Tesla (NASDAQ:TSLA) and Chipotle (NYSE:CMG) recently did their shorts.
Whether You Own SHOP or Trade it Just Ignore the Experts
Investors itching to get long now should take partial positions to leave room for risk management. Short-term, price is trading inside a clear range between $555 and the highs. A breach of either sides will carry momentum in that direction. The short-term bets on it would be to chase SHOP stock lower if the bears succeed in breaking the lower line. Then they can target $500 first and then $470 second. This scenario is not tradable unless the trigger happens. Conversely, a new high would fuel another round of buying that I would not short.
To reiterate the message today, Shopify is a stock to own for the long term … but from the right price. Shorting the rallies without technical reasons is reckless, just like it is futile to look for a perfect entry point. That opportunity may never come.
I would like to own it on the next violent dip. I do practice what I preach, because I recently used options to buy-the-dip it suffered from the ill-advised Raymond James downgrade for fast profits. Then with bearish technical trigger, I shorted it briefly for half a day also for more profits.
I mention this not to boast but to hammer home an important point that all investors should know. Both trades were successful because I knew my specific time frames and had triggers to do so. People often just follow the herd without consulting their own opinions. There are no trades that fit all portfolios. Ignore what the experts recommend in the headlines because they are doing it for pay. These days there are tools to allow anyone to do research and make up their own mind. This is especially important with momentum stocks like Shopify.
Nicolas Chahine is the managing director of SellSpreads.com. Join his live chat room for free here. As of this writing, he did not hold a position in any of the aforementioned securities.