It is becoming pretty clear that a speculative bubble is inflating right now. Money-losing companies with market caps in the tens and even hundreds of billions of dollars have become the norm, not the exception. People, who have been in the market for just a couple of months are bragging online about the phenomenal returns they’ve made, as if stocks are not businesses but lottery tickets. One such bubble stock is Shopify.
Every bubble needs a story. And not just any story, but a great story about changing the world or being “the next” something. Shopify is said to be the next Amazon. Hardly anyone saw the original Amazon coming, but now everyone agrees on the next one. We remain skeptical.
The investing public is so convinced and so optimistic about Shopify’s future success, that the company is currently worth nearly $150B. To put that in perspective, Bristol-Myers Squibb, the pharmaceutical major, has roughly the same market cap.
Bristol, however, makes almost $50B in sales and $15B of free cash flow a year. Shopify’s revenue, in contrast, is ~20 times lower and the company is barely profitable. Investors appear to be taking future growth for granted and willing to pay dearly for it years in advance…
Shopify Can Drop 50% or More in Elliott Wave Correction
Obviously, fundamentals don’t count for much in a speculative mania. So, we’re taking a look at Shopify stock from another angle. The chart below puts its spectacular surge in Elliott Wave context.
In just five years, SHOP climbed from as low as $18.48 to as high as $1285.19. There is no point in calculating those gains in percentage terms. Suffice it to say it’s A LOT. The problem is that this huge uptrend looks like a textbook five-wave impulse.
The pattern is labeled (1)-(2)-(3)-(4)-(5), where the five sub-waves of wave (1) are also visible. According to the theory, a three-wave correction in the opposite direction follows every impulse. So, if this count is correct, we can expect a notable decline in Shopify stock soon.
To achieve a meaningful retracement, the negative phase of the cycle should drag the price down to at least the support of wave (4). Given how overvalued Shopify currently is, we won’t be surprised to see an even bigger drop. The RSI indicator supports the bearish outlook with a strong divergence between waves (1), (3) and (5).
Business fundamentals don’t matter until they do. No trend lasts forever and every bubble ends the same way – in tears. Judging from the Elliott Wave analysis above, there is not much left of Shopify’s bull market. As market euphoria rages on, investors would be better off keeping their animal spirits in check.
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!