Shopify is a cloud-based commerce platform founded in 2004 and headquartered in Canada. Its market cap is approaching $50 billion, even though the company is not yet profitable. We know from history that profits determine a business’ success in the long-term.
In the short run, however, investors’ emotions is what makes a stock rise or fall. In Shopify’s case, investors have been too optimistic recently. The stock is up 2160% in the past four years, climbing from $18.48 in January 2016 to $422.55 this month.
Unfortunately for the bulls, no trend lasts forever. Facts are facts and it is a fact that a price to sales ratio of 32 makes Shopify extremely overvalued. Therefore, once investors run out of optimism, the stock is likely to fall significantly. The question is, How soon?
The daily chart above shows Shopify’s entire progress since the company went public in May 2015. As visible, the price appears to have formed a textbook five-wave impulse pattern, labeled 1-2-3-4-5. It certainly has been a wonder to behold while it lasted.
The problem is the Elliott Wave theory states a three-wave correction follows every impulse. Normally, the corrective phase of the cycle would erase the entire fifth wave. For Shopify, this means a tumble to the support of wave 4 near $280.
Given the company’s lack of profitability, it is not that hard to imagine a 50% selloff once wave 5 ends. The RSI indicator reinforces the negative outlook with a bearish divergence between wave 3 and 5. If this count is correct, the next couple of years can be a lot different than the past four. Unless investors believe in unicorns, too, they should stay away from Shopify stock.
Similar Elliott Wave setups occur in the Forex, crypto and commodity markets, as well. Our Elliott Wave Video Course can teach you how to uncover them yourself!