Shopify: When The Music Stops

Apr. 28, 2020 9:40 PM ETShopify Inc. (SHOP), SHOP:CA275 Comments

Summary

  • Shopify is benefiting from the work-from-home environment and seismic shift to online retail.
  • Expect online spending to decline once the government handouts stop and some employees go back to work. The remainder will be broke and unemployed.
  • Pickup in small business sites will be short-lived as the 90-day free trials end. However, the increased interest will stress Shopify's infrastructure and increase costs.
  • The stock price is extremely overvalued unless one assumes profitability going forward which is unlikely given the transaction-based business model and coming recession.
  • I do much more than just articles at Digital Transformation: Members get access to model portfolios, regular updates, a chat room, and more. Get started today »

Readers that follow my work probably recognize that I like breakout stocks involved in the area of digital transformation. We are in the midst of a seismic shift towards the cloud and online retail, accelerated by the pandemic. Thus my interest in this area of investing.

There is much to be said for investing in breakout stocks. Such stocks are recognized by the markets either due to specific events, changes in company fundamentals, or change in the macroenvironment. As a technical analyst, I relish such movers because stocks that aren't movers tend to suck up dead money, even if they are exceptional companies. You can wait a long time to see a return on investment or you may even be investing in a value trap.

While I like breakout stocks, they are volatile and hence risky. It is important to separate the real deal from the head fakes.

In my latest weekly list of breakouts, I added Shopify Inc. (NYSE:SHOP), an e-commerce stock that has most certainly benefited from the pandemic with a recent breakout to an all-time high.

Shopify stock chart

(Source: Yahoo Finance/MS Paint)

And here is where I make my confession and beg for mercy from my followers. Back in September, I gave Shopify a bearish rating.

Shopify performance since last article published

(Source: Seeking Alpha)

I believe that this may have been my worst call ever, as the price of Shopify stock is up 100% since the article was published. For me, this serves as a reminder that being bearish about a digital transformation stock is seldom a good idea. On that note, I am changing my rating to neutral. I still can't be bullish on this stock and the reason is that when the government sugar rush ends, and it will end, we will be in a global recession.

When the music stops the

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This article was written by

Steve Auger profile picture
6.61K Followers
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I have been trading stocks, commodities, and options for more than 25 years. I have honed my skills in quantitative analysis and various stock investment tools for 15 years at Portfolio123 and offer services as a consultant in stock portfolios. I also own the financial data service Equity Analytx which provides aggregated fundamentals for a wide range of industries.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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