Shopify Stock News and Forecast: After SHOP dropped 10%, where is the next entry point?

• SHOP plunged more than 10% on January 4.
• Shopify trades at about 44 times sales.
• Shopify stock is feeling the brunt of the sell-off in growth stocks.

Shopify (SHOP) surprised many of its backers when it closed down an unusual 10.4% on Tuesday, January 4. The stock had been trending lower since November 19 when it reached an all-time high just shy of $1,763. Tuesday’s drop seems macroeconomic in nature and unrelated to company fundamentals, but there are several chart indicators that lead FXStreet to believe there is more contraction to come.

Shopify Stock News: higher interest rates a bad environment for growth

The reason for consensus being that macroeconomic issues are to blame is that a number of other high-multiple growth stocks also dropped harshly during Tuesday’s session. Leading Buy Now Pay Later provider Affirm Holdings (AFRM) dropped more than 10% as well, software provider HubSpot (HUBS) contracted more than 7%, and Asian ecommerce darling Sea Limited corrected more than 11%. In fact, nearly all popular US growth stocks fell by the wayside.

Although it is impossible to be certain at this point that the Federal Reserve is to blame, the growth sell-off narrative hinges on the Fed raising interest rates in 2022, something that it has hinted at in recent months. With higher rates comes a flight to safety and more competitive coupon payments from bonds. Additionally, the higher interest rates supply a higher discount rate to the formulas used to value growth stocks. This makes value stocks that already produce cash flows appear much more attractive that profitless growth stocks that may be many quarters off from dependable cash flows.

With the Fed moving toward less accomodative policy throughout the next 12 to 18 months, investors are expecting that these growth names will suffer and that taking profits now may be the safest option. With a price/sales ratio at 44, SHOP is a poster child for expensive growth stocks. The extremely high profit margin of 81% could shelter its fall, but in an environment where growth stocks are less attractive, investors should expect further multiple compression.

SHOP key statistics

Market Cap	$183 billion
Price/Earnings	54
Price/Sales	44
Price/Book	16
Enterprise Value	$177 billion
Operating Margin	11%
Profit Margin	81%
52-week high	$1,762.92
52-week low	$1,005.14
Short Interest	3%
Average Wall Street Rating and Price Target	Buy, $2,093.32

 

Shopify Stock Forecast: better entries to come

SHOP shares dropped below the zero lower bound of the daily chart’s Fibonacci retracement graph on Tuesday. Though SHOP price respected several Fibo levels since the all-time high on November 19, including the 50%, 38.2% and 23.6% Fibos, Tuesday’s plunge ripped right through the lower bound. This is the first sign that this contraction should continue. Additionally, the signal line fell below the MACD line on the Moving Average Convergence Diverence indicator.

SHOP 1-day chart

Secondly, the daily chart shows that SHOP stock price dropped decisively below the range support at $1,285.90. This signifies that support is yet to be found.

SHOP 1-day chart

With a drawdown the size of yesterday’s, it would be unusual if the market just forgets about it anytime soon. Instead, a 10%-plus pullback unrelated to the company normally means more pain lies ahead. Instead of jumping in at the current price above $1,200, wait until SHOP falls into the demand zone between $1,005 and $1,031. This region supported the SHOP share price on three separate occasions in March through May of this year, and it seems appetizing for a further long in the coming months.

SHOP 1-day chart

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