Shopify (NYSE:SHOP) is the mother of all momentum stocks. The company earned this moniker from me because it moves so fast that it’s almost impossible to catch it perfectly into a rally. That’s why trading SHOP stock requires a bit of technical know-how. Otherwise the right thing to do is to own it for the very long term.
The quarantine forced all businesses to establish electronic sales outlets. Shopify is there to fill the demand with turnkey solutions. Consequently it will have a tailwind for a while.
It has rallied so fast that investors need a lot of conviction in its mission. Management is doing great executing on plans near perfectly.
Fundamentally it is not cheap but that’s OK for as long as they deliver growth. Judging it from its 677x astronomical price-to-earnings ratio makes no sense at this stage. That metric works well for a mature company like Apple (NASDAQ:AAPL) or Salesforce (NYSE:CRM), for example.
Exuberance has built up a lot of investor hopium. As a result, the current price-to-sales is too high. It has 53 years worth of full year sales already baked into price. That alone is not a reason to short it but could become an issue in a bearish market.
However, the bulls are still in charge on Wall Street so I have an optimistic overall outlook on Shopify stock. Consequently I continue to share upside opportunities when they present themselves. That was $550 lower than now so I would say I’m more of a fan than a critic.
SHOP Stock Will Mature into Its Valuation, Trade It in the Meantime
From a trading perspective, the strategy is clear as it trades sideways. I would rather buy the dip into support near $960, or I would chase the rip above its prior failure point. The first level to watch is at $1,100. But the real interest in it would emerge when it sets a new all-time high.
If the bulls are able to breakout from $1,150 then the sky’s the limit. Shopify stock would then literally be running into open air. The bears would have nothing against which to short.
There could be a lot of upside after a new high. The stock rallied 70% in April once it broke out from the February pandemic crash level. For the following five months the stock spent time consolidating inside this wide range. Once they break out of it, the bears are tired and the bulls overwhelm them. There should be another 50% rally from there. Consequently, by the middle of next year, SHOP stock could very well be on its way to $2,000 per share.
It sounds strange throwing such big numbers in a serious write-up, but this is 2020 after all. Anything can happen and we should all expect the unexpected.
When a stock teeters so violently between two limits, breaking through either side carries momentum in that direction. In this case Shopify stock has very consistently traded between $840 and $1,120 per share. Odds are that it’s brewing another burst. We just don’t know which way yet.
Don’t Ignore the Risks
We’ve already mentioned what could happen on the breakout, but bad things could happen on the breakdown. If for whatever reason it falls below $840, that could open a $100 trapdoor or more.
Those who love the stock cannot fathom this scenario, but reasons for sell-offs are not always intrinsic. In this case the stock market is near all-time highs and still setting records. All the while the macroeconomic conditions have not improved much. This is counter-intuitive and leaves the indices susceptible to corrections.
If that happens all stocks, including Shopify, will fall through no fault of their own. In other words, even if I absolutely believe in its strength, I have to know there are outside risks. The stock has to trade inside the prism of the entire stock market.
The bulls are in charge so I expect them to buy every dip. Therefore I am comfortable selling puts below to generate income off of Shopify stock.
The advantage of doing so is not needing a rally to profit. For example, I can sell the January $735 put and collect $3 per contract. This means that even if the stock falls 31% from here I can still retain my maximum gains. If it collapses then I would break even at $732, leaving a lot of room for error.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.