Why Now May Be the Time to Take Profits Off the Table with Shopify Inc.

What does volatility have to do with shares of Shopify Inc. (TSX:SHOP)(NYSE:SHOP)? Here’s what.

| More on:

With global stocks trading within a relatively low band of volatility for some time, represented by CBOE Volatility Index (VIX) numbers hovering below 10 for most of July (hint: that represents historically low levels of volatility), August has seen a bit of increased volatility.  This has resulted in stock price swings taking over much of the discussion surrounding financial markets.

The large jumps in volatility have been reflected in the stock price of Shopify Inc. (TSX:SHOP)(NYSE:SHOP), a company who saw its biggest decline this past month on August 10 correspond with an increase in the VIX on the same day of nearly 30%. While other factors are at play here, and the fact remains that these two factors are tied together (not independent), it is interesting to take a look at a company such as Shopify as a quasi-volatility proxy, as many companies in the tech sector exhibit interesting stock movement patterns which are generally inversely related to volatility (see the stock price of Amazon.com, Inc. on August 10).

While many stocks may be inversely related to volatility (some funds actually benefit from increased volatility), it is interesting to think about how increased volatility over a given period of time may impact a company like Shopify. Technology companies generally rely on economic consistency to justify massive valuations. Any disruption in revenue or earnings growth attributed to a slowdown in economic activity due to economic issues which may become apparent in volatility data would certainly be a very bad thing for a high-growth company such as Shopify.

Stable is good for most firms, but an argument could be made that companies like Shopify that rely on triple-digit growth rates may be much more sensitive to volatility movements than the broader market. After all, should the VIX increase or decrease, a stable utilities firm with locked in revenue contracts for the next 15 years may be less susceptible to stock price movements than a company that could see its share price drop dramatically if it posted 80% earnings growth instead of 100% earnings growth analysts expected (which is not that far off from the truth in the case of Shopify).

Bottom line

An important factor investors need to consider with a company trading at valuations approaching the stratosphere is that sensitivity to volatility, or geopolitical/economic issues that might lead to such volatility, can be a very bad thing for investors hoping for short-term gains. While Shopify’s long-term business model looks appealing, unless a given investor is looking at the e-commerce company from the lens of a 10-year investment time horizon, I would steer clear of Shopify for the time being.

Stay Foolish, my friends.

 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

owns shares of Amazon. owns shares of Shopify. The Motley Fool owns shares of Amazon, Shopify, and SHOPIFY INC.

More on Tech Stocks

Business man on stock market financial trade indicator background.
Tech Stocks

1 Growth Stock Down 50 Percent to Buy Right Now

There are plenty of growth stocks in the market worth considering, but Shopify (TSX:SHOP) looks like one of the best…

Read more »

Woman has an idea
Tech Stocks

Prediction: 1 Stock That Could Trounce the Market 

The TSX has been favouring tech stocks, but not this one. However, it has the potential to trounce the market…

Read more »

clock time
Tech Stocks

Long-Term Investing: 3 Top Canadian Stocks You Can Buy for Under $20 a Share

These three under-$20 stocks offer excellent buying opportunities for long-term investors.

Read more »

Businessman holding AI cloud
Tech Stocks

AI Will Transform Everything: Investors, Be Early Adopters and Buy These 3 Stocks

Investors looking to invest in companies doing big things in AI should consider these three stocks for their portfolios.

Read more »

stock research, analyze data
Tech Stocks

Forget Shopify: These Unstoppable Stocks Are Better Buys Today 

Should you consider buying Shopify stock while rivals consider a buyout or should you go for stocks with a stronger…

Read more »

A colourful firework display
Tech Stocks

2 Potentially Explosive Stocks to Buy in March

These two growth stocks are destined for many more years of market-crushing returns.

Read more »

edit CRA taxes
Tech Stocks

TFSA Millionaires Are Learning They Can Still Be Taxed

If you day trade stocks like Shopify (TSX:SHOP) in a TFSA, you may be taxed.

Read more »

Shopping and e-commerce
Tech Stocks

Where Will Lightspeed Stock Be in 5 Years?

Lightspeed stock (TSX:LSPD) continues to be touch and go, so what might happen in the next five years?

Read more »