Shopify Stock Has Soared. It’s Time to Take Profits, Analyst Says. – Barron’seCommerce
For Shopify investors, it might be time to get off the train.
The Ottawa-based e-commerce software company’s shares have been on an absolute tear. Shopify stock (ticker: SHOP) is up 61% year to date, about twice the return on Amazon.com (AMZN) shares. That has pushed the stock’s valuation to dizzying heights.
With a market cap of close to $75 billion, the stock is trading at 38 times consensus estimates on 2020 revenues of just under $2 billion. Analysts expect a small loss this year, with projected profits of 54 cents a share in 2021—which gives the company a price-to-earnings ratio of more than 1,200 times next year’s earnings.
Canaccord Genuity analyst David Hynes on Thursday morning concluded that the Shopify valuation has reached an unsustainable extreme. He cuts his rating on the stock to Hold from Buy, while leaving his price target of $600 in place. Note that the average price target on the Street for Shopify shares is $513, well below Wednesday’s close at $639.61.
Hynes writes that his philosophy on software stocks in the current environment has been to stick with perceived havens, those with the smallest chance of meaningful downward earnings estimate revisions.
“These are admittedly crowded trades, but in a tape like this, valuation really only matters at extremes,” he writes. “Investors have lumped Shopify into this group as secular tailwinds and the potential acceleration of the move to online commerce is almost surely a safe bet.”
But Hynes sees two issues with this trade. One, he isn’t convinced that gross merchandise value growth at the company’s customers is “as bulletproof as perceived as discretionary spending retreats.” And two, he asserts that the stock’s valuation is now at an extreme: “We just can’t get there anymore on valuation, which is why we’re downgrading.”
To have a Buy rating on the stock, he says, you have to believe the stock can appreciate at least 10%, which would take the stock to $700. Let’s say, he writes, that in one year you would be willing to pay 20 time 2022 revenues for the stock. (As an aside, he notes that 18 months ago, a premium valuation would have been 12 times, not 20 times.) That would point to $4.5 billion in 2022 revenue—a 41% compounded growth rate. None of the other software “category killers”— Adobe (ADBE), Salesforce.com (CRM), ServiceNow (NOW), Workday (WDAY)—grew that fast at this size, he notes.
“Our point is that Shopify is already pricing in near-perfection, and that’s a risk that seems silly to take in this environment,” he writes.
Despite the downgrade, Shopify shares on Thursday are little changed, at $640.01.
Write to Eric J. Savitz at email@example.com
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