Ever since Andrew Left of Citron Research came out against Shopify Inc (US) (NYSE:SHOP), SHOP stock has been struggling. But the charts are actually shaping up in a way that makes me wonder whether SHOP can hit new highs. So, should we buy Shopify now?
What did Left do to hurt the stock in such a devastating manner? Essentially, he waved a flag of panic, saying shares could plunge 50% to his $60 target — and that’s before the FTC gets involved. I don’t like that someone can make such drastic claims and then profit from a short-term dump in the stock. I don’t know that Left trades around these declines, but it seems unethical, at best, if he does.
Valuation of SHOP
But we’re not debating the ethics of using Twitter Inc (NYSE:TWTR) to juice a short position. We’re talking about Shopify. My biggest issue with SHOP stock isn’t that I think the Federal Trade Commission will come knocking. Rather, it’s the valuation.
SHOP stock trades at a pricey 17.5 times its trailing 12 months of sales. Estimates of $658 million in sales for fiscal 2017 call for roughly 70% growth from fiscal 2016. But keep in mind we’re already three quarters of the way through fiscal 2017, while estimates for 2018 only call for 32.7% revenue growth.
That’s still an impressive number, but for a company without positive free-cash flow (FCF), operating cash flow (OCF) or net income, there are question marks. So what do we make of this?
Analysts expect earnings of 6 cents per share and 24 cents per share in 2017 and 2018, respectively. While that’s not quite the same thing as net income, at least it’s positive. But there are too many strikes on the ballot for me; I think SHOP stock price is overvalued.
To be honest, Shopify appears to have a great business. Admittedly, I do not have firsthand experience with it, but it seems generally well-received by many of its users. So, don’t confuse my take on the company vs. its valuation. Keep in mind, SHOP stock price has more than tripled from its January low to its September highs.
Trading SHOP Stock Price
Just because a stock has a high a valuation, doesn’t mean it can’t trade higher. SHOP stock price is a prime example of this, with shares up massively on the year. Others, like Amazon.com, Inc. (NASDAQ:AMZN) and Netflix, Inc. (NASDAQ:NFLX) had lofty valuations in the past (and to an extent, still do) and kept rallying, as is Tesla Inc (NASDAQ:TSLA) now.
So there’s no reason the SHOP stock price can’t go higher, particularly with a chart like this. Since May, SHOP stock has continually bounced off trend-line support. SHOP briefly broke below this level, only to recover two days later.
Another plus? The MACD measure (blue oval) is turning positive. This indicator is a measure of short- to intermediate-term momentum. With the black line ready to cross the red line, momentum is turning bullish for SHOP stock.
There are some negatives, though. The first, a downward line of resistance has shown itself. Should it come into play once more, short-term gains could halt near $108 to $110. The downward sloping 50-day moving average is the other negative. While it hasn’t yet broken below the 200-day moving average — which is known as a “death cross” — it’s moving lower nonetheless. It’s not a deal-breaker for longs, but a sign that longer-term momentum has faded.
Still, above trend-line support, I like SHOP stock. If Shopify can push through $110, it could run back toward $125. This would set up SHOP to race higher by nearly 20%.
While it may not be a blind buy-and-hold, SHOP stock is a worthy trade, unless it violates support.
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