If investors are looking to shop for market leadership, Shopify (NYSE:SHOP) definitely qualifies. But buying SHOP stock at today’s prices also carries with it the burden of increased risk both off and on the price chart. Let me explain.
Source: Shopify via Flickr
I’ve been bullish on more than one occasion over the past couple years in e-Commerce business platform Shopify. Most recently, that optimism was immediately in front of notorious short-seller Citron Research promoting shares as having nowhere to go but down after a rapid run.
It almost goes without saying our bullish viewpoint looked silly on the heels of that. Citron warned that SHOP stock was set to trade down $100 over the next 12 months. But as this clash of opinions on Shopify shares was during the first three trading days of the second quarter, Citron’s bearish gain of roughly $16 in paper profits was also fleeting.
Shopify Stock Took Off
At the same time, our discussed slightly-above-the-market entry price in SHOP was triggered only a handful of days later. And the stock has literally never looked back. In just over two months, Shopify shares have rallied from below $210 to north of $310 as of Wednesday’s close.
The $100 run-up and return of 47% versus the S&P 500’s gain of less than 1% over the period not only shredded Citron’s “nowhere but down” thesis, but also demonstrates SHOP stock’s obvious market leadership. It also raises the specter of shares having a more credible ‘nowhere to go but down’ scenario play out.
Bottom line, despite Shopify shares still being positioned as “best in class” — a view shared by Citron, mind you — “a real” rapid run in SHOP coupled with competition from Square (NYSE:SQ), Facebook (NASDAQ:FB) and possibly Microsoft (NASDAQ:MSFT), does make Citron’s prior risky valuation concerns more sound.
Some SHOP stock bulls may say this is a baseless opinion. I understand. Well-intentioned warnings of nosebleed P/E’s or worries of other traditional metrics which appear priced for perfection are still far from perfect indicators for a growth company like Shopify. Still, a baseless SHOP stock on the price chart should have ironclad agreement among bulls (and bears), and that’s a worry in the near-term.
SHOP Stock Weekly Chart
Looking at SHOP stock’s weekly chart, my takeaway is Citron may finally get its $100 drop this year. With this rally, Shopify shares are lacking any kind of meaningful weekly basing patterns near current levels. The stock has also largely fulfilled any type of upside price targets from previous base breakouts.
A correction of this magnitude would simply put shares into a testing position of Shopify’s 50% retracement level. That’s just above the short, flat base which had this strategist upbeat on shares back in early April.
Along with this formidable technical support, the move would work out to a correction of roughly 32%. Since that’s just over the classic 30% level generally accepted as constructive behavior in growth stocks, I’m confident a nice buying opportunity in SHOP stock would also be at hand.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional options-based strategies, related musings or to ask a question, you can find and follow Chris on Twitter @Options_CAT and StockTwits.
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