Not long ago, Shopify (NYSE:SHOP) was supposed to be “the next Amazon (NASDAQ:AMZN).” We don’t know how people come up with such comparisons, but when the stock is flying it is easy to get carried away dreaming.
And SHOP was flying, indeed. It reached an all-time record of $1763 in November, 2021, up an astonishing 478% from its pandemic bottom in March, 2020. In other words, investors multiplied their money by almost six in just a year and a half. Very impressive, indeed.
Alas, despite its strong revenue growth and surging stock, Shopify only became profitable in 2020. Furthermore, its level of profitability could hardly justify a market cap north of $220 billion in 2021. In other words, Shopify was a textbook example of a bubble stock.
Unfortunately, no-one cares while the stock price is rising. The bad news is that no trend lasts forever and every bubble eventually pops.
Besides, there was also an Elliott Wave warning on Shopify ‘s charts for those who cared to look. We did, and on Jan. 27, 2021, shared our concerns with readers.
The stock had just exceeded the $1200 mark, but the uptrend already had a complete impulsive structure. According to the theory, this pattern, labeled (1)-(2)-(3)-(4)-(5), meant a notable correction can soon be expected.
We admit we expected it to occur much sooner than it actually did. Being early, however, is not the same as being wrong. As Warren Buffett once put it, we’d rather be approximately right than precisely wrong.
Shopify's Crash Is An Opportunity For Investors To Learn From Their Mistakes
With that in mind, we wrote that “every bubble ends the same way – in tears.” Almost a year and a half after we published this chart, Shopify stock sits at $368, down 68% since our article and 79% from its record.
SHOP gave the bulls plenty of time to evacuate as wave (5) evolved into an ending diagonal pattern. We wonder how many saw the warning signs and took their profits.
Judging by the speed and sharpness of the following crash, not many. The point is there were plenty of signs—the missing profits, the extremely high valuation, the Elliott Wave pattern, the bearish RSI divergence—all spelling trouble for Shopify shareholders.
So, if you’ve managed to get out near the top, good for you. Just be careful not to mistake luck with brains, because everybody is a genius in a bull market.
On the other hand, if you’re among the many investors currently licking their wounds from the crash, you have only yourself to blame.
Now, with Shopify down 80% from the top, some are probably wondering if the time to buy has arrived. We remain skeptical. The company is expected to make just $1.04 in earnings per share this year.
At $368.50, that is a price to earnings ratio of 356. Despite losing four fifths of its market value, Shopify is still extremely overvalued and therefore poised to keep falling. We remain on the sidelines.