Why Shopify Inc. Will Return to $150

Shopify Inc.’s (TSX:SHOP)(NYSE:SHOP) stock has been on a rough ride lately. Why that might be an opportunity for some investors.

| More on:

Shopify Inc.’s (TSX:SHOP)(NYSE:SHOP) stock was soaring high this year, and it looked unstoppable, as it was hovering around $150 until some unfounded criticism from a short seller sent the stock reeling, dropping it below $120.

Although the company’s Q3 results continued to show strong sales growth, investors did not feel that Shopify’s leadership went far enough in addressing the criticisms relating to the company’s business model.

Now that the dust has settled, and we’ve seen everyone’s poker hands, there’s one question that is still unanswered:

Where does Shopify’s stock go from here?

I was never a fan of Shopify’s valuation and considered the stock to be very overvalued to begin with. At $126, Shopify’s stock may be a bit less overvalued than it was at $150, but that’s of minimal importance.

Investors are willing to pay for hype, and the valuation principles that are normally used to evaluate growth and value stocks simply don’t apply to stocks like Shopify where investors seem to be in too much of a frenzy to pay attention to valuations.

After seeing big swings in price after the criticism of the company’s business model and after an inadequate response to it in the Q3 conference call, we’re left with a stock that is stuck in limbo. Last week, the share price was flat and fluctuating in a range between $121 and $128.

What this might signify is that the share price has found some stability, a top or a bottom, depending on whether you see Shopify’s stock as being half full or half empty right now.

Shopify’s price is going to continue to climb

One way to identify when a share price is trending upward is when its lows are getting higher. After the initial criticism of the stock in early October, Shopify’s stock fell to as low as $111 a share, and after its Q3 results, its low only reached $121.

This suggests to me that the stigma has started to wear off from the bad news, like it always seems to do. Consider what happened with Home Capital Group Inc. (TSX:HCG) and the big bump it got when the company received a lifeline and big investment from Warren Buffett.

Ultimately, the hype died down, and the impact of the news was short-lived. I see a similar pattern happening with Shopify. With more time, investors will put their concerns related to Shopify’s business model in the rear-view mirror for one big reason:

Shopify is still growing sales, and nothing has adversely changed about its business

If the concerns were valid to begin with, we would see more fallout from Shopify users, people that actually use the service would know if the company’s promises are exaggerated. We would also see sales decline in future periods, which I predict won’t happen.

When investors see that this isn’t the case, the investment dollars will come flowing back into Shopify. The business still has problems, and I’m not a big fan of it by any means, but I also don’t think the recent negative press is enough to derail the stock, and it could get back up to $150 before the year is over.

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.

Fool contributor David Jagielski has no position in any stocks mentioned. Tom Gardner owns shares of Shopify. The Motley Fool owns shares of Shopify and SHOPIFY INC. Shopify is a recommendation of Stock Advisor Canada.

More on Investing