Is Shopify’s (TSX:SHOP) Recent Correction Overdone?

The writer of this article may or may not have positions in the securities below. Current positions of the writer had no influence on the outcome of the research or stocks listed inside of this article.

It looked like it was going to be a record year for one of Canada’s top stocks – Shopify (TSX:SHOP). Through August 27th, the company was on a multi-month bull run and its stock price was up 197%, topping out at a 52-week high of $543.79. 

It appeared the stock could do no wrong as it was touching highs almost weekly. Analysts struggled to keep up and the average price target on the street had almost doubled to $442 per share, up from $220 at the start of the year. 

Unfortunately, the good times did not last. Shopify’s bull run has turned into its worst correction since the company went public back in 2015. Since hitting highs, the company has lost 28% of its value. Yesterday, another exclamation point was added as Shopify’s stock dropped by 6%.  

What has changed? Not a whole lot. Fundamentals are still strong, and the company is still expected to post one of the highest growth rates in the industry.  

The only noteworthy news over the past month has been the $450 million purchase of 6 River Systems (which makes warehouse autobots) and a $698 million share offering 

As part of its equity raise, the company is issuing 2.1 million shares at a price of US$317.50 per share. It is worth noting that this was at a 6% discount from where it was trading when the offering was announced.  

Shopify’s drop came before its share offering

It is also important to note that the downtrend began a few weeks prior to the share offering and as such, was not the sole catalyst for the recent drop. Shopify’s stock price has since dropped well below its offering price and as of writing, has settled at $US295.47 per share.  

As a Shopify owner, am I disappointed in the correction? Absolutely. Am I surprised? Not in the least. 

Shopify’s metoric rise was not sustainable and it was trading at expensive valuations. At its peak, the company was trading at 37 times sales. This is more than double its historical average of 12.5 times sales and well above the industry average of 4.5 times.  

Given its expected growth rates, there is no doubt that Shopify deserved a premium, but even the bullish of bulls would admit its price got a little ahead of its self.  

The good news? After eight straight days of negative price action, Shopify is now in oversold territory with a 14-day RSI of 28. This is an indication that the company’s stock price may be bottoming and is due for a bounce.  

Mat Litalien and Daniel Kent are long Shopify.