Shopify’s Bubble May Be The Next To Burst – Seeking AlphaeCommerce
Zoom (ZM) isn’t the only stock that has seen an incredible run that has reached bubble-like levels. Shopify (SHOP) is in that same camp too. Now, like Zoom, the Shopify bubble may finally be about to pop.
Shopify’s valuation is at astronomical levels, trading for 42 times its next 12-month sales estimates. While investors often like to compare to Shopify’s opportunities to that of Amazon (AMZN), Amazon never traded at such lofty levels, even in its early days.
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Analysts do see a bright future for the company, just likely not bright enough to justify the company’s massive market capitalization of nearly $107 billion. Currently, analysts see revenue for the company rising by more than double, or 150%, by the year 2022, to $4 billion from $1.6 billion in 2019, or nearly 26.3 times those sales estimates. That’s almost 10 times greater than Amazon’s multiple of 2.8 times its sales of $473 billion vs. its market cap of $1.35 trillion. Amazon’s revenue is forecast to rise by nearly 69% to $473.6 billion from $280.5 billion over that same period.
If one were to adjust those sales multiples for the revenue growth rates, one would find that Amazon is still more favorably valued to Shopify, much like a PEG ratio, with Amazon trading at 0.04, while Shopify trades for nearly 0.175. So while Shopify has a faster revenue growth rate than Amazon, it’s still trading at a much higher valuation when compared to Amazon, even when adjusting for that revenue growth.
Even stranger is that analysts have not raised their revenue estimates for the company in a meaningful way despite the stocks big jump. Sales estimates for next year have risen from $2.6 billion in June of 2019 to $2.9 billion in June of 2020.
Technical Warning Signs
The technical chart for Shopify is flashing just as many warning signs as the valuation. The stock ran up dramatically since breaking out in April when the shares were trading for only $450. Since that time, the stock has run up by 110%, a massive move higher in such a short period.
Now it’s showing many signs that are indicative of a reversal of trend. The first being the relative strength index that has failed to make new highs despite the stock price soaring to record levels. The RSI has consistently been unable to rise to new highs on four occasions. This type of action is known as a bearish divergence and is indicative of a stock that is topping out, and in this case, moving lower.
Additionally, the stock has been rising on falling levels of volume, another bearish indication. This pattern is typically indicative of an equity that has a waning number of buyers.
Should the stock drop below support at $850, then it seems likely that it should fall to around $740. That’s its next level of technical support. That’s also where there is a giant technical gap created after the stock broke out rising above a downtrend on June 12. Should it fall back that gap, it would amount to a drop of roughly 18% from its price of $900 on June 29.
There are risks to my assumptions because the market has not been acting rationally since the coronavirus pandemic has started, first falling sharply, and then recouping nearly all of its all losses on the S&P 500. This price action has come despite a severe contraction in the economy and has resulted in valuation in the stock market to become very stretched and overvalued.
While Shopify may undoubtedly have a bright and prosperous future in the e-commerce space, its current valuation seems detached from reality.
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