Shopify Stock Wavers In the Wake of Another Secondary Stock Offering

E-commerce platform company Shopify (SHOP) has been on a hot streak of secondary stock offerings. In 2020, the company raised $2,578,591 in two separate stock offerings. SHOP cashed in again this week by raising another $1,551,700 in a secondary stock offering of 1.18M shares priced at $1315. The company stated the funds will “strengthen its balance sheet, providing flexibility to fund its growth strategies.” As of December 31, 2020, SHOP already had accumulated $6.39B in cash, cash equivalents and marketable securities. That whopping 160% year-over-year increase makes me believe that Shopify’s main intention is funding an imminent acquisition.

The offering came on a wild day of trading in a stock market with a split bear/bull personality. With the NASDAQ (COMPQX) gapping down 2.0% and trading down as much as 3.9%, SHOP’s timing for this offering was unlucky. While the company only offered a 4.8% discount to the prior day’s closing price, traders took the stock down as much as 12.7%. SHOP managed to close with a 5.9% loss. In the wake of this wavering, SHOP pulled off a near picture-perfect test of support at its 50-day moving average (DMA) (the red line below) even as it completed a reversal of its bullish breakout earlier in the month.

Shopify (SHOP) perfectly tested 50DMA support but closed below its 20DMA.

Post-Secondary Price Action

Last month, I wrote a piece explaining how to understand the price action from stock offerings. Per that guidance, SHOP is in a short-term negative position: at one point, the stock traded far below the offering price and closed below the offering price. A close above $1315 makes the stock a buy again with the added bonus of confirming 50DMA support and creating a new 20DMA breakout.

Shopify’s earnings report last week adds a wildcard to the interpretation of the price action. The results were very strong yet SHOP dropped 3.3%. So clearly investors were already in a bit of a profit-taking mode ahead of the secondary. In other words, SHOP is not technically in the clear until after it closes its post-earnings gap.

Still, SHOP had a strong 2020 even with a pandemic and two massive stock offerings. Clearly, demand for the shares are strong. SHOP’s secondary stock offerings are a natural response to this strong demand. If history repeats, the overhang from the offering will be yet one more speedbump on the way to higher prices.

Be careful out there!

Full disclosure: no positions

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