Shopify: Time to Get Rid of the ‘High-Flying’ Stock?

Shopify (SHOP) stock, which has provided stellar returns this year, suddenly lost momentum at the beginning of September. The stock had lost more than 20% in the month as of September 27. It’s been in free fall since September 13 and has continued its falling streak for eight days.

SHOP jumped 6.5% on September 25 but then fell for the next two days. In total, Shopify stock is down around 14.3% in the last 11 days. The stock has also fallen around 25.4% from the 52-week high of $409.61 it reached on August 27. Shopify stock is up 120.8% year-to-date.

Shopify closed at $305.69 and tumbled around 2.38% on September 27. Its shares were falling in premarket trading on September 30.

Why is Shopify stock falling?

We don’t know the real reason behind the slump in Shopify stock. However, its secondary stock offering and acquisition of 6 River Systems probably triggered the massive sell-off. On September 19, Shopify priced its secondary stock offering worth over $600 million at $317.50 per share. Shopify stock also intended to acquire 6 River Systems for $450 million earlier this month. However, we don’t think the offering and acquisition could have led to such a massive decline in its stock.

The stock sell-off could also be the result of profit-booking. However, some analysts are reportedly not favoring “high-flying” tech stocks with aggressive valuations. For instance, Jeff Marks, an analyst with Jim Cramer’s Action Alerts, reportedly believes that it’s risky to own premium stocks with low earnings growth. Like Shopify, some other tech giants have taken a beating recently. Slack, Twilio, Roku, and Okta have plunged around 23%, 18%, 34%, and 23%, respectively, to date.

It seems CNBC’s Jim Cramer rightly predicted the Shopify stock trend and could, therefore, make a profit from the stock. Cramer purchased the stock in May for $260 and sold it for around $388 on August 23.

Shopify is trading at a premium

Shopify stock is trading at a premium. The stock is trading at a PS (price-to-sales) ratio of 17.88x for the next 12 months. In comparison, Shopify’s peers PayPal and Square are trading at PS multiples of 5.97x and 9.12x, respectively. Shopify stock looks unattractive to its peers, as its growth rate is also declining.

Analysts expect its 2019 revenue to rise 43.4% YoY (year-over-year), much lower than the previous year’s growth rate of 59.4%. Analysts also expect sluggish growth in 2020 at 34.3% YoY. Analysts expect its earnings to grow 60.7% YoY in 2019 and 56.3% YoY in 2020.

Analysts’ ratings and technical readings

Around 16 out of 28 analysts have given Shopify stock “buy” ratings. Eleven analysts have given it “holds,” while only one has given it a “sell.”

Shopify’s 14-day RSI (relative strength index) level is 35.75, indicating that investors are neutral on the stock. An RSI reading of above 70 indicates that a stock is in “overbought” territory, while an RSI level of below 30 means that a stock is in “oversold” territory.

On September 27, Shopify stock closed near its Bollinger Band middle-range level of $342.29. The value denotes that the stock is neither overbought nor oversold.

After looking at the technical indicators, we suggest investors take a wait-and-watch approach to Shopify stock. The sell-off trend indicates that investors should sell the stock and book profits. Meanwhile, the stock could be a good pick for the long term, as it has delivered an impressive earnings performance in recent quarters. Shopify also has a better view of its full-year revenue, and it’s making efforts to take on rival Amazon. However, its valuation remains a concern.

Sneha Nahata does not own Shopify shares.