Shopify Stock Fades Gains Ahead Of Q4 Earnings; Fast-Growing Toast, 4 Top Chip Stocks Also Set To Report

Fourth-quarter earnings season is winding down, but Shopify stock is among a group of top-rated growth companies set to report earnings in the coming week. Shopify (SHOP) has a perfect Accumulation/Distribution Rating of A+, fueled by above-average gains in recent weeks.

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On the heels of bullish earnings reports from semiconductor stocks Monolithic Power Systems (MPWR) and Axcelis Technologies (ACLS), watch for upcoming reports in the chip sector from Lattice Semiconductor (LSCC), GlobalFoundries (GFS), Analog Devices (ADI) and Applied Materials (AMAT).

LSCC stock initially had trouble clearing a 76.57 entry in January. But the chip designer soared above the entry in heavy turnover Feb. 1. The stock has run up ahead of earnings due Monday after the close, but GFS, ADI and AMAT stocks are closer to proper entries. These might work better with call-option trades ahead of results.

Shopify Stock Shows Strength

After six straight weekly gains, Shopify stock has started to pull back in light volume after soaring out of a cup base in January.

Shopify, a provider of e-commerce tools for retailers, is no stranger to strong revenue growth.

The stock soared 17% on Oct. 27 when the company reported Q3 results that showed a narrower-than expected loss and revenue that topped expectations.

Revenue increased 22% to $1.37 billion, just above the $1.33 billion consensus. Gross merchandise volume rose 11% to $46.2 billion.

In the current quarter, the Zack’s consensus estimate is for break-even earnings, with revenue up 19% to $1.64 billion. Results are due Wednesday after the close.

The company has beefed up its logistics services. In September 2019, Shopify paid $450 million to acquire warehousing automation firm 6 River Systems. In May 2022, it bought shipping services provider Deliverr for $2.1 billion.

Crocs Orderly Pullback

Footwear maker Crocs (CROX), due to report Q4 results Thursday, has drifted off highs and is close to another test of its 50-day moving average.

After several quarters in a row of strong revenue growth, Q4 is expected to jump 60% to $937.9 million.

Early last year, Crocs completed its acquisition of privately held Hey Dude for $2.5 billion in cash and stock.

Crocs is on the Leaderboard watchlist.

Meanwhile, two stocks on the Leaders List — Visteon (VC) and Medpace (MEDP) — are also on the earnings docket.

Automotive supplier Visteon has a relative strength line in new high ground ahead of its report, due Thursday before the open.

Medpace, a provider of clinical research-based drug and medical device development services, has come under selling pressure ahead of earnings due Monday after the close. Shares gapped up and soared 38% on Oct. 25 after Q3 growth accelerated from the prior quarter.

Toast (TOST), featured in The New America, reports Thursday before the open. Toast isn’t profitable yet, but fund ownership has soared in recent quarters amid explosive revenue growth.

Options Trading Strategy

A basic options trading strategy around earnings — using call options — allows you to buy a stock at a predetermined price without taking a lot of risk. Here’s how the options trading strategy works and what a call option trade recently looked like for Shopify stock.

First, identify top-rated stocks with a bullish chart. Some might be setting up in sound early-stage bases. Others might have already broken out and are getting support at their 10-week moving average for the first time. And a few might be trading tightly near highs and refusing to give up much ground. Avoid extended stocks that are too far past proper entry points.

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In options trading, a call option is a bullish bet on a stock. Put options are bearish bets. One call option contract gives the holder the right to buy 100 shares of a stock at a specified price, known as the strike price.

Put options are for weak performers with bearish charts. The only difference is that an out-of-the-money strike price is just below the underlying stock price. A put option gives the holder the right to sell 100 shares of a stock at a specified price.

You earn profits when the stock falls below the strike price with a put option.

Check Strike Prices

Once you’ve identified an earnings setup for a call option, check strike prices with your online trading platform, or at cboe.com. Make sure the option is liquid, with a relatively tight spread between the bid and ask.

Look for a strike price just above the underlying stock price (out of the money) and check the premium. Ideally, the premium should not exceed 4% of the underlying stock price at the time. In some cases, an in-the-money strike price is OK as long as the premium isn’t too expensive.

Choose an expiration date that fits your risk objective but keep in mind that time is money in the options market. Near-term expiration dates will have cheaper premiums than those further out. Buying time in the options market comes at a higher cost.

See Which Stocks Are In The Leaderboard Portfolio

This options trading strategy lets you capitalize on a bullish earnings report without taking too much risk. Risk is equal to the cost of the option. If the stock gaps down on earnings, the most you can lose is the amount paid for the contract.

Shopify Stock Option Trade

Here’s what a recent call option trade looked like for Shopify.

When Shopify stock traded around 49.70, a slightly out-of-the-money weekly call option with a 50 strike price (Feb. 24 expiration) came with a premium of around $3.05 per contract, or 6.1% of the underlying stock price at the time. It was an expensive trade, exceeding the 4% risk threshold, but the expiration was still a ways out.

One contract gave the holder the right to buy 100 shares of Shopify stock at 50 per share. The most that could be lost was $305 — the amount paid for the 100-share contract.

When taking the premium paid into account, Shopify would have to rally past 53.05 for the trade to start making money (50 strike price plus $3.05 premium per contract).

Follow Ken Shreve on Twitter @IBD_KShreve for more stock market analysis and insight

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