Shopify Inc (TSX:SHOP)(NYSE:SHOP) has been one of the hottest stocks this year, rising by more than 80% since the start of the year and over 25% in just the past month. Trading at new all-time highs, there’s a danger that the stock might be rising too quickly and could be due for a big correction.
While the company is coming off a strong quarter where its sales were again up an impressive 50% year over year, the stock was already off to a strong rally even before then. And with growth rates for Shopify continuing to slow down and competition only increasing, there’s reason to believe that the company could be facing tougher times ahead. Instagram Checkout, in particular, could put a big dent into Shopify’s sales since the social media site will make it easier for vendors to sell directly from their Instagram pages rather than having to use Shopify’s platform. However, that still hasn’t phased investors who are very bullish on the stock.
One way to measure the bullishness is by looking at the Relative Strength Index (RSI), which is an indicator that tracks the stock’s gains and losses over the past 14 trading days. Currently, Shopify’s RSI is approaching 84, and once it’s above 70 it is considered to be overbought. And at a price-to-sales ratio of more than 35, investors are paying a big premium for a stock that’s probably had its best (growth) days behind it and there’s little reason to expect a profit from the company anytime soon. There’s little reason to expect the stock to keep going at this pace and investors might be better off to consider cashing in on their gains.
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