Shopify, Inc. (SHOP) analysts have recently turned cautious, worried the Canadian e-commerce platform has risen too far too fast ahead of May 2 earnings, raising odds for a significant sell-the-news reaction. However, rapid growth makes it equally likely the company will blow away estimates and report an unexpected profit, intensifying a momentum-fueled rally that’s now in its fifth month.
The stock has risen more than 70% since the start of 2017 while gaining more than 250% since the first quarter of 2016. Even so, impressive growth has supported the vertical advance, which is showing no signs of letting up. There’s also little evidence of sustained profitability, with the company breaking even in the fourth quarter of 2016, after losing 2-cents per share in the third quarter.
Even so, 86% year-over-year revenue growth highlights a bullish story that’s attracted intense buying interest since the stock posted an all-time low at $18.48 in January 2016. The company continues to add merchants at a rapid pace, averaging 33,625 new accounts per quarter in 2016, with first quarter comparisons set to dictate sentiment and price behavior into the summer months.
SHOP Daily Chart (2014-2017)
The stock came public in May 2015 at $28 after its 7.7-million initial public offering was priced at $17. It took off in a brief rally one month later, lifting to $42.13 and reversing quickly in a decline that tested the IPO opening print. Tests at resistance in August and October failed to yield breakouts, ahead of a steady downtick that reached the upper teens in January 2016. It tested that level one month later and turned higher, completing a double bottom reversal.
An uptick into the second quarter of 2016 stalled in the lower-30s, with that price zone denying progress into an August breakout that stalled just above 2015 resistance. The stock ran in place for the rest of the year, failing to respond to the November election despite the big rally in broad benchmarks. The lid finally came off when the calendar flipped into 2017 in January Effect rally that’s gathered force into the second quarter, lifting the stock into a series of new highs.
Monthly Stochastics lifted into the overbought level in August 2016 and has stuck like glue for the last nine months. This is typical in a strong uptrend, but the cycle is getting long in the tooth, raising odds the indicator will set off a sell signal in the next three to six months. The weekly indicator crossed into a bear cycle in February and turned higher in April, working off overbought technicals through time instead of price. This bodes well for higher prices in coming weeks.
SHOP 60-Minute Chart (2017)
Price action since January has tracked the red rising trendline, with at least four tests at support finding strong buying interest. It’s currently situated near $73, identifying the level to watch if earnings trigger a sell-the-news reaction. A breakdown should trigger even lower prices, but a rout is unlikely as long as the stock holds secondary support at $70 and the 200-bar EMA. On the flip side, the rising channel in place since February could slow or stall momentum rallies above $80.
A breakdown through support may also test the rising 50-day EMA at $67. Buyers will command the tape until that level breaks, signaling a deeper correction that could eventually test breakout support and the 200-day EMA near $50. Bulls hold the upper hand despite downside risk, given the impressive growth trajectory and high odds they’ll report a first-quarter profit that will surprise skeptics.
The Bottom Line
Shopify heads into tomorrow’s earnings priced for perfection, but the company could still exceed expectations and trade much higher in a momentum fueled advance. Interested market players should pay close attention to merchant growth and EPS vs. consensus for signs the company is headed for sustained profitability.
<Disclosure: the author held no positions in aforementioned stocks at the time of publication.>