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Shopify Stock Has a Dip Coming, and You Definitely Should Buy into It

Bret Kenwell

If you were to only look at shares of Shopify (NASDAQ:SHOP), you probably wouldn’t know anything is wrong. For instance, the escalating trade war with China and now Mexico would not be a worry. Given how well Shopify stock has done over the past month, many observers might also overlook the fact that the S&P 500 has been down for four straight weeks.

When Will Shopify Stock Hit $300?

Source: Shopify via Flickr

There’s no other way to put it: Shopify stock has been an unstoppable beast. Shares are still consolidating near the recent highs after more than doubling from its December lows and is up more than 130% in just over five months.

At some point though, SHOP has to get off the rocket ship. That’s just the way it is. Timing that departure is a lot harder than it seems though, given that it can happen very quickly and in a very painful fashion. Just see Nvidia (NASDAQ:NVDA) for proof.

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That brings up the question of, should investors buy Shopify stock at $250?

Trading Shopify Stock

SHOP stock

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SHOP stock price is backing off the $290 highs it was pushing last week. The fact that the stock can continue pushing new highs in this environment is incredible.

I loved this name on its $155 breakout and subsequent retest where it held the 10-week moving average (purple arrow). But I didn’t expect another $100+ to come so quickly.

There’s a lot of doubt surrounding this name thanks to its high valuation. Many argue, as they do for The Trade Desk (NASDAQ:TTD), Roku (NASDAQ:ROKU), Twilio (NYSE:TWLO) and other high-growth stocks, that Shopify stock is overvalued. They say the stock price can’t support the business and that it’s destined for collapse.

The only problem with that theory? These shares double, triple, quadruple and more, all while these worries persist. Not being able to value it by traditional metrics makes it difficult to price a name like Shopify, but not impossible. Further, these stocks tend to get hammered during market-wide corrections.

SHOP stock stood up stronger than its high-growth peers but still came in about 30% from the Q4 highs. A similar correction would bring us to $200 a share should we get similar summer volatility. That would likely be a solid buying opportunity, although many investors would still balk at that price.

Unless the market really starts to implode though, it could be a while before we see SHOP stock this cheap. How about $250 then? Shares are down over 3% to start the week, down to $265. Another few days like that and $250 could be right around the corner. That would bring Shopify down to the 10-week moving average. This moving average has been guiding shares higher for all of 2019.

This level needs to give way before any further downside is seen.

Bottom Line on Shopify Stock

Aggressive bulls will likely gravitate to SHOP stock at $250. This would represent a 12.5% decline from the highs. That said, if the market is turbulent enough, Shopify is sure to get hit harder than that. If it does, the 50-day moving average currently near $238 could come into play, while the May lows of $242 may also buoy the name.

Below those marks and maybe we get the slippery-slope decline down to $200-ish.

Understand one thing though. When companies cement themselves behind a strong brand with impressive growth, investors will almost always pay a premium. As for growth, SHOP stock has it.

Estimates call for last year’s revenue of $1.07 billion to grow 41% to $1.51 billion this year. 2020 estimates call for 32.5% growth to $2.01 billion in sales. Essentially, Shopify is forecast to double its revenue from 2018 to 2020. Better than that is its earnings growth, though.

Estimates call for earnings of 58 cents per share this year, up 52.5% year-over-year from 38 cents per share. In 2020, forecasts call for earnings of 94 cents per share, up 62%. Even better though, the company has a solid balance sheet and is turning free cash flow (FCF) positive. Cash and short-term investments stand at about $2 billion, with just $100 million in long-term debt.

At almost 20 times this year’s revenue and near FCF neutral, I’m not making the case that SHOP stock is cheap. But it’s a name for growth investors to own should they be able to scoop it up on a steep discount. Conservative growth bulls may bite at $250, but will certainly be interested near $200. Let’s see how it does this summer.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long TTD and ROKU.

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