Comeback Alert: Shopify’s Rally Is About to Begin

Key Points

• Shares of Shopify have been trending down since the start of the year while the rest of the market has rallied. 
• The latest drop came from this month’s earnings report and contracting margins.
• However, there are several reasons to think the selloff is overdone, and a major rally is about to begin.

It’s been a tough couple of weeks for investors of Shopify Inc. NYSE: SHOP. Indeed, while the broader market has been setting record highs since the final weeks of last year, shares of the e-commerce platform have been sinking some 40% from their high in February. 

It's not a great look for a stock that was still working to undo% drop. What about being in a downtrend when most, if not all, of your peers are sinking, the damage from 2021 and 2022’s jaw-dropping 90 too? Wall Street has little patience for stocks that sink while the rest of the market rallies. 

Weak Guidance

The catalyst for the latest drop of 25% since the first week of the month was Shopify’s Q1 earnings report. Despite topping analyst expectations for both headline numbers and showing impressive year-on-year revenue growth of 24%, a 50 basis point drop in their gross margin figure completely spooked investors. It didn’t help that as a result of this, management’s forward guidance came in a little light. 

Shopify shares gapped down more than 15% the following day and only really looked likely to start bottoming out towards the end of last week. But was this a justified reaction? Sure, a contraction of that magnitude in gross margin is going to impact future profits, but as CEO Harley Finkelstein said, investors are “seeing the strongest version of Shopify in our history.” 

Upside Potential

What’s interesting for those of us on the sidelines is that, despite the recent drop and longer-term downtrend that’s developing, this isn’t exactly an isolated view. In the 2 weeks since Shopify released their earnings, more than a dozen of the Wall Street heavyweights have commented bullishly on the stock’s potential. To be fair, many of those reiterating their Buy or Outperform ratings did so while trimming their price target on Shopify shares. However, even those lowered price targets are still pointing to significant upside from current prices.

Take Canaccord Genuity Group , for example, which, alongside restating its Buy rating , also lowered its price target from $90 to $80. But from the $59 that Shopify shares were trading at during Monday’s session, that still suggests an upside of more than 30%. That’s n though. 

The price target reduction from Citigroup, which reiterated its Buy rating in the aftermath of the earnings report, was from $105 to only $95. That’s almost an upside of 60% from current levels, not to be sniffed at. 

Considering a Position

Indeed, given that Shopify shares topped out at $90 back in February, that means that even with the refreshed price target, Citi is still expecting the company to trend back towards a high post-selloff in the coming weeks. All this suggests there's a serious bargain to be had right now that won’t be around for much longer. 

The technical argument supports this thesis, too. Shopify’s relative strength index (RSI) reading, a measure of how overbought or oversold a stock is, is only just starting to come out of the extremely oversold territory it spent much of last week in. This is the result of the consolidating price action that started at the end of last week and which has kept shares above their post-earnings low of $57. 

The fact that the bears have been unable to take the stock below here means momentum is starting to swing to the bulls. The longer the stock can stay above that level, the more likely it is to start testing the upside. We saw a hint of this on Friday when Shopify shares finished at their high of the day for the first time since April. It’s worth watching for more bullish momentum this week, as the upside potential is real and could be realized sooner than you think.