Shopify (NYSE:SHOP) stock qualifies as a fast mover. Therefore, investing in it is trickier than normal. Investors must be very choosy with their actions. Homework on fundamentals alone may not be enough. In addition, Wall Street is currently going through a crisis of confidence. (Just consider the overnight action from yesterday as an example).
Volatility is extremely high, which has made some tough days for active traders.
For example, yesterday, the CBOE Volatility Index (INDEXCBOE:VIX) spiked 10% for no reason. Stocks fell apart as the Nasdaq tumbled 4% lower. SHOP stock fell 7% in sympathy to the tech drubbing that happened. Facebook (NASDAQ:FB) may have started the deluge. After all, it fell 26% from the reaction to its earnings report.
Magically, last night’s reactions to Amazon (NASDAQ:AMZN), Pinterest (NYSE:PINS) and Snapchat (NYSE:SNAP) were the exact opposite of FB. This also levitated SHOP stock up 9% after hours. Clearly, investors are on edge and they have no issues changing their minds fast. The prospects of the Federal Reserve ending the quantitative easing and starting tightening is worrying people.
SHOP Stock Is a Buy on Dips
Consequently, risking funds on momentum stocks like Shopify is now an extremely daunting task. So let’s break this process into smaller pieces and facilitate it a bit. My overall impression of the stock is one of admiration. This is the closest thing to an Amazon that I have seen in years. That’s perhaps the highest compliment that I can give it, which makes Shopify stock a buy on dips.
Despite its quality, it has lost more than half its value since November. Yet, it is still 150% above its pandemic lows. As such, the altitude it lost is not a guarantee of absolute bottoms. Moreover, it is soon going into an earnings report. Judging by the reaction from FANG gang already, things could get really interesting. Facebook and Netflix (NASDAQ:NFLX) crashed and burned, while the other two shined brilliantly.
Luckily investors don’t need too many experts to put their minds at ease about SHOP. The stock has excellent financial metric representation. It all points to a success story, one of which Canadians should be proud. The company grew revenues on average more than 70% per year. The top line is now 10 times the size of what it was just a handful of years ago. Last year, it even had a positive net income of $3.4 billion.
While it is still young, it has maintained an incredible growth rate through a pandemic. Management clearly deserve some benefit of doubt during tough stock stents. The even better news is that it does not come with bloat.
Shopify’s valuation seems reasonable with its price-to-earnings ratio barely above 30x. Frankly, I find that strange because it’s almost the same as its price-to-sales. It’s safe to say that SHOP stock is not exorbitantly expensive.
Use Caution With Shopify
Therefore, my assumption is that it will find footing within this incredible rally. I imagine that management will put up another strong report card in a few weeks. However, that’s not a guarantee that the investors will rejoice and rally on the news.
If that were the case, then Robinhood (NASDAQ:HOOD) stock should have fallen on its poor report. Instead, it rallied to no end as if it delivered a gem.
SHOP stock is too close to its Jan. 24 lows, and that makes me a bit nervous. Technically, the levels from that day are a threat to the bulls. Losing that could launch it lower and fast. With that in mind, investors would do well to not go all in, especially into an earnings report.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Nicolas Chahine is the managing director of SellSpreads.com.