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SHOP Stock Is About To Go on Sale — After Earnings

Tim Biggam

Shares of Shopify (NASDAQ:SHOP) continue to move inexorably higher. SHOP stock is up nearly 200 points, or 144%, so far this year. The seemingly insatiable demand for anything online shopping related has pushed Shopify to unbelievable heights. All good things must come to an end, however. Look for the rather ridiculous rally in SHOP to cool after earnings.


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Certainly SHOP stock is not cheap on any fundamental metric. The TTM P/E ratio is over 800, but P/E ratios can be deceiving for newer companies. Price to sales, a much cleaner look, is a better way to look at valuations. It is now at the highest multiple ever for SHOP with a reading over 30! You can see how the P/S multiple has expanded dramatically as the stock moved higher. This multiple expansion is the main impetus behind the recent red-hot rally. Any hint of disappointment will take the multiple- and the stock price- lower.

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SHOP stock is looking a little tired from a technical take. Shopify is having difficulty breaking through overhead resistance at the $340 area, having failed now on four attempts. 9 day RSI continues to deteriorate with a series of lower highs. MACD is poised to generate a sell signal on any further weakness. Momentum is clearly waning. SHOP is also trading at a premium to the 20 day moving average which has led to pullbacks in the past.

SHOP is due to report earnings on August 1 with consensus of 3 cents EPS on revenue of $350 million. The whisper number, or what analysts really expect, is for 7 cents in earnings. SHOP stock now has a market cap nearing $33 billion, so revenues of just $350 million always make me question the valuation and expected growth rates at such extremes. I think it will definitely be a case of sell the news in SHOP after earnings.

One only needs to look at the recent post earnings price reaction of fellow competitor ServiceNow (NASDAQ:NOW) to perhaps glean how SHOP may react. NOW beat expectations on both the top and bottom line yet shares fell sharply post earnings. Companies priced for perfection need a substantial beat to keep the momentum going. This assuredly applies to Shopify stock given the recent run up and valuations.

Stock traders looking to add a short to the portfolio should consider shorting SHOP stock on any rally in front of earnings. Option traders may want to look at selling an out-of-the money bear call spread to position to be a seller at higher levels. Selling the August $350/$355 call spread for a $1.50 net credit provides a 42% return on risk while still allowing for a 5% upside cushion to the $333.34 closing price of SHOP stock.

As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at timbiggam@gmail.com. 

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