Shopify keeps rallying despite downgrades; what's the catch?

Key Points

• Shopify has gained 75% since November, with shares continuing to gain this month.
• In the meantime, they've received four downgrades with plenty of cautious comments. 
• It's looking like the risk-on sentiment is too bullish to hold shares back, and the rally is on until it's not.

It's perhaps a sign of the times that we are once again seeing tech stocks defy gravity. With inflation looking increasingly tamed and expectations continuing to rise for a rate cut from the Fed, tech stocks are enjoying their biggest run since 2021. The risk-on sentiment, which came flooding back into the market in November, has, for all wants and purposes, continued right through into January, with stocks like Salesforce Inc. NYSE: CRM continuing to gain and the S&P 500 index on the cusp of all-time highs. 

Also in that camp is e-commerce giant Shopify Inc NYSE: SHOP, whose shares are currently at their highest level since February 2022. That was back when they were caught in a near-vertical dive, which wouldn't bottom out until later that year, but since then, Shopify shares have gained 240%. 

They have a long way to go yet before they're anywhere near their former highs, but for now, at least, it seems the stock is intent on rallying. It was one of the best-performing tech names last week and is up more than 75% since the current phase of the rally kicked off in November. 

Summarizing then for a moment, we're looking at a tech stock that was decimated back in 2022 enjoying its best run in years - what's the catch, you ask? 

Divergence from commentary

What's interesting about all this right now, though, is that while shares have almost doubled in recent weeks, Shopify has been on the wrong side of several analyst updates. Rarely do you see a stock diverge so much from the consensus, and downgrades of the type that Shopify has received are usually synonymous with a downtrend, something that Shopify shares are most definitely not in. 

It all started at the beginning of last month when ATB Capital Markets downgraded their rating on Shopify stock from Outperform to Sector Perform, a move that was echoed by the guys at Wedbush. While both teams stopped short of calling the stock a sell, it was a cautious move that effectively said shares were about fairly valued where they were. The following week, the team at DZ Bank also downgraded Shopify, but this time was more negative and went from a Hold rating down to a Sell. Then it was JMP Securities' turn just before Christmas when they downgraded Shopify to Market Perform.

The common theme across the board seems to center on the company's outlook now being as rosy as previously thought or guided. In particular, Shopify's 2024 operating income is expected to land below the consensus, which in turn will hurt the company's margins. 

Getting involved 

For all that, though, it appears as if investors are happy to shrug off the potential downside here in the face of a broader economic outlook that keeps improving. For e-commerce stocks like Shopify, rising consumer optimism and, in turn, consumer spending can only be a good thing, and the prospect of both apparently outweighs any frothy income estimates. 

It's worth noting that while much of the talk on Shopify in December was cautious, if not outright bearish, the stock has started 2024 with its longest run of green days since June 2021 - a trend that's still currently active. To be sure, the company's next earnings report, due the first half of February, will need to be spot on. Shopify's valuation has inflated considerably since their last report in November, so any slip here could easily justify the skepticism and cautious outlook shared last month. 

But the reality is the whole macro-economic landscape is shifting, and it's shifting very much in favor of the bulls. If this was a year ago, there's no way a stock would be continuing to gain in the face of several downgrades, but such is the risk-on sentiment now in play that investors are willing to back stocks that once flew high in the hope that they will soon be back there again.