Shopify (TSX:SHOP)(NYSE:SHOP) had a good month in March. Rising 6.5%, it made some progress toward recovering from the damage it took earlier in the year.
Like many tech stocks, Shopify began tumbling in November. In that month, the stock reached a high of $2,140. It began falling along with the tech sector after hitting that peak. Initially, there was little more to explain the selloff than broader momentum in the tech sector. Stocks correlate with other stocks, especially stocks in the same sector, and Shopify behaved in the predicted way late last year.
This year, SHOP began falling for reasons unrelated to other tech companies. Its first-quarter earnings release was mixed, with a big miss on GAAP earnings. The company lost $2.95 per share in GAAP terms, when $0.31 was expected. Revenue and adjusted earnings were good, but investors zeroed in on the GAAP loss and sent Shopify tumbling far more than the average tech stock.
That brings us to today. In April, Shopify is rising, thanks to a combination of sector-wide tech momentum, and company-specific factors. This may or may not continue, but it’s worth exploring. So, in this article, I will explore two factors that may be contributing to Shopify’s latest rally.
Tech sector rallies
The most obvious reason for Shopify’s gains is sector-wide momentum. As I explained earlier, stocks are correlated with other stocks in the same sector. In March, tech stocks made gains. For the month, the NASDAQ-100 clocked an 11% gain. Shopify rose along with it. SHOP’s own gains were less than those of the NASDAQ-100, so perhaps it was tech momentum rather than anything specific to Shopify that caused the rally.
Dip buyers take interest
Nevertheless, we can’t rule out investors taking an interest in Shopify itself. SHOP is listed on the TSX and NYSE, not the NASDAQ, so index ETF flows wouldn’t explain its returns. There may be company-specific factors at play.
One of those would be the stock’s cheapening valuation. In the past, SHOP was one of the most expensive stocks in the world, often trading at over 50 times sales. Today, it is much less expensive. At today’s prices, SHOP trades at 19 times sales, 107 times adjusted earnings, and 30 times GAAP earnings. This is still very expensive, but it’s much cheaper than SHOP used to be, and the company is still growing revenue at 41%. Perhaps investors are beginning to smell value here. At 41% growth, high multiples can be justified. I’m still not sure whether Shopify’s current multiples are justifiable, but there is theoretically some price at which it becomes a buy. Perhaps investors thought that it reached that level last month when it went below $800.
Foolish takeaway
Shopify stock has given investors a wild ride since November 2021. Since that time, the stock has gone up and down many times. Over the last six months, the trend has been negative. But in March, we saw the stock start to recover. Perhaps the bullish trend will continue into April.
