<p>If you were just looking at shares of Shopify (NASDAQ: SHOP), you probably would not know that something is wrong. For example, the escalating trade war with China and now Mexico would not be a concern. Given how well Shopify shares have performed over the past month, many observers may also overlook the fact that the S&P 500 has been down for four straight weeks.
There is no other way to put it: Shopify shares have been an unstoppable beast. The shares are still consolidating close to the recent peaks after more than doubling from their lowest levels in December and having risen more than 130% in just over five months.
At some point, however, SHOP must get off the rocket ship. That’s just the way it is. Timing the departure is much more difficult than it seems, however, given that it can happen very quickly and in a very painful way. See only Nvidia (NASDAQ: NVDA) for evidence.
This raises the question of whether investors should buy Shopify shares for $ 250?
Trade Shopify shares
I loved this name of its $ 155 breakout and subsequent reconsideration where it contained the 10-week moving average (purple arrow). But I did not expect another $ 100 + to come so quickly.
There is a lot of doubt about this name due to the high valuation. Many claim, as they do for The Trade Desk (NASDAQ: TTD), Roku (NASDAQ: ROKU), Twilio (NYSE: TWLO) and other high-growth stocks, that the Shopify stock is overvalued. They say that the share price can not support the business and that it is intended for collapse.
The only problem with that theory? These parts are doubled, tripled, quadrupled and more, all while these worries remain. Not being able to value it with traditional measurement values makes it difficult to price a name like Shopify, but not impossible. In addition, these stocks tend to hammer during market-wide corrections.
The SHOP share was stronger than its high-growth peers but still came in about 30% from the Q4 tops. A similar correction would give us $ 200 per share if we were to get similar summer volatility. It would probably be a solid buying opportunity, although many investors would still strike at that price.
If the market does not really start to implode, however, it may take a while before we see SHOP stocks so cheap. How about $ 250 then? The stock is down over 3% to start the week, down to $ 265. A few more days like that and $ 250 could be just around the corner. That would bring Shopify down to the 10-week moving average. This moving average has controlled shares higher throughout 2019.
This level must give way before further disadvantages are seen.
The conclusion of the Shopify share
Aggressive bulls are likely to earn SHOP shares at $ 250. This would mean a 12.5% drop from the tops. That said, if the market is turbulent enough, Shopify will surely be hit harder than that. If it does, the 50-day moving average currently close to $ 238 could come into play, while the May low of $ 242 could also bend the name.
Below these marks and maybe we will slip the decline down to $ 200-ish.
Understand one thing though. When companies cement themselves behind a strong brand with impressive growth, investors almost always pay a premium. When it comes to growth, the SHOP share has it.
Estimates suggest that last year’s revenue of $ 1.07 billion would grow 41% to $ 1.51 billion this year. 2020 estimates require 32.5% growth to $ 2.01 billion in sales. In essence, Shopify is expected to double its revenue from 2018 to 2020. But better than that is its profit growth.
Estimates require earnings of 58 cents per share this year, an increase of 52.5% compared to the previous year from 38 cents per share. In 2020, forecasts require earnings of 94 cents per share, an increase of 62%. Even better, the company has a solid balance sheet and turns the free cash flow (FCF) positively. Cash and short-term investments amount to approximately $ 2 billion, with only $ 100 million in long-term debt.
Almost 20 times in this year’s revenue and close to FCF neutral, I do not make the case that the SHOP share is cheap. But it is a name that growth investors should own if they could take it up on a steep discount. Conservative growth bulls may bite at $ 250, but will certainly be interested in close to $ 200. Let’s see how it goes this summer.
Bret Kenwell is the director and author of Future Blue Chips and can be found on Twitter @BretKenwell. As of this writing, Bret Kenwell is long TTD and ROKU.