Summary
- This is a Shopify stock price action analysis. SHOP is in consolidation, and has held its near term bottom firm since May.
- We haven’t seen a bear trap significant enough to stop its bearish bias. We believe that its price action is still tentative.
- To improve outperformance, our reverse cash flow model suggests that investors should add below $200 (presplit).
- Therefore, we reiterate our Hold rating on SHOP stock.
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Thesis on Price Action
With a detailed price analysis, we continue our post FQ1 article about Shopify Inc. We stated in our last update that SHOP was likely to reach a near-term low. Our thesis has been confirmed as the price action formed its near-term support at the $305 level.
We haven’t seen any notable bear trap (significant rejections of selling momentum), so SHOP is still firmly rooted in a bearish bias.
The risk/reward ratio of adding here is low according to our reverse cash flow valuation model. We explain why investors should wait until the 2018 intermediate support retraces before adding exposure. Investors can add exposure to the stock if it falls below $200 (pre–split). Investors should note that SHOP will trade on a
We believe that it is crucial for investors to learn price action analysis and “sensing skills” to evaluate such “mountains”, like SHOP. It’s especially important for high-growth stocks due to their premium valuation. Shopify’s lack of consistent free cash flow (FCF), profitability has hindered its revenue growth.
We observed that SHOP appears to be at a near-term low, supported by $305 in near-term support. It has maintained its support from its May lows, and has absorbed the selling pressure during the June sell-off. Its price action is positive for near-term consolidation. We haven’t seen a bear trap which would be critical for SHOP in its efforts to reverse the bearish trend. We believe that SHOP’s direction is still uncertain.
Investors should be cautious if another bulltrap is set at levels below the April bull trap ($710) Bull traps can be a warning sign of steep sell-offs that will force investors to liquidate their positions quickly.
Investors should wait to see if the near-term resistance ($405) is tested before they consider adding. Be prepared to sell again if a bull trap appears at this level.
SHOP – Add Below $200 to Your Order (Pre-Split), But Not Now
The market won’t be gentle if the stock is priced at a premium. It will significantly impact the FCF payback period. Investors (including ourselves) learned important lessons that can be used to ensure consistency in FCF profitability throughout the growth stocks bear markets.
As you can see, Shopify’s continued investments in fulfillment will have a significant impact on its FCF margins through FY24. Investors should adjust their expectations for SHOP stock, and expect volatility as the market decides how to value it. We believe that revenue multiples-based valuations won’t be as helpful given Fed’s QT. Investors are encouraged to refocus their attention on FCF at least for the next few years.
SHOP is a high growth stock due to its embedded growth premium (yes it’s still traded at premium). We believe that a hurdle rate 25% above the market is appropriate. To model growth, we used a FCF yield of 2.2%.
TTM FCF margins of 9% were used. We also included a discount calculated from consensus estimates to ensure a reasonable margin for safety.
We calculated a TTM revenue target for Shopify of $15.3B, which Shopify must achieve in CQ4’26. It also implies a revenue CAGR (increase in revenue) of 27.11% between FY21-26. We believe that Shopify has more room to make mistakes/invest in other areas if the entry price is $200 or less.
Is SHOP a Buy, Sell, or Hold?
We reiterate our Hold rating on SHOP stock. It’s near its bottom so selling it now is not a good idea. Investors who are thinking of layering out should reduce their exposure to the next bull trap.
SHOP may underperform even at current levels, according to our valuation analysis. Investors should be patient if entry is below $200 in order to obtain a lower valuation and improve their chances of being outperformed.
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