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Jan 21, 2022

Why some analysts are still bullish on Shopify despite 48% plunge

The bullish case for Shopify despite valuation concerns


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Tech darling Shopify Inc. has become such a heavyweight on the Toronto Stock Exchange that when it moves, the broader market feels it.

Since its Nov, 19 peak though, Shopify’s stock price has been almost cut in half, leaving some shareholders reeling and others likely wondering whether the drop presents a good entry point.

“I think it’s really caught up along with all the other higher multiple growth-oriented stocks – mostly technology stocks – and the impact of rising rates on the company’s valuation,” said Martin Toner, director of institutional research, growth and innovation at ATB Capital Markets, in an interview.

“Higher-multiple stocks tend to be more volatile and I think if you looked at Amazon’s stock over the last 10 years, I bet you it’s drawn down by roughly 20 per cent a significant number of times. And it’s just because the multiple is so high,” he said.

“They make just as much sense at their highs as they do when there’s some volatility and they draw down to a certain extent. You just have to alter your return expectations.”

As of Friday, Shopify’s price-to-earnings ratio – or the amount of money shareholders would need to invest to receive one dollar of the company’s earnings – clocked in at a whopping 226, according to Bloomberg data. That far outpaces the Toronto Stock Exchange’s average price-to-earnings ratio of 19.

Shopify’s growth was already on a tear in recent years, but that exploded during the COVID-19 pandemic, when lockdowns forced many mom-and-pop retailers to begin selling their products online.

However, as vaccinations became more widespread and in-person shopping returned, some investors and analysts have been questioning whether the company’s growth can continue at that pace.

On Friday, Shopify shares fell deeper into negative territory after Insider reported it ended a contract with multiple warehouse and fulfilment partners, in a possible signal it could look to bring more of its inventory management and logistics services in-house.

Mark Mahaney, senior managing director and head of internet research at Evercore ISI in the United States, agreed in that interest rate risk has been one of the biggest headwinds for tech stocks recently, including Shopify.

“There are two trends that have really mattered this year for tech investors. One is the timing of the COVID recovery and aggressively rising interest rates,” he said. “That has a material impact on high-multiple stocks.”


Mahaney upgraded his rating on Shopify to a "buy" in December when the stock was down around 20 per cent from its peak, before markets began pricing in much more aggressive rate hikes from the U.S. Federal Reserve.

His 12-month price target on the company’s U.S. listing is currently US$2,228. On Friday, the shares closed at US$882.12.

Mahaney doesn’t think high-growth stocks will outperform until there is clarity on when COVID-19 shifts from a pandemic into a more manageable endemic phase, but added that Shopify is worth looking at for investors – if they have a longer time horizon.

He acknowledged the stock could fall further but said, ultimately, he doesn’t see any major fundamental issues and thinks the company is a good play on the rising direct-to-consumer retail trend.

“The longer your investment horizon, the more you should be willing to wade in here and buy pieces of Shopify. Would I fully build out a Shopify position today? Absolutely not. But if I didn’t own any Shopify, this is when I’d look to start building my position,” he said.

“Don’t expect to make money in the next three months – but you could be making really good returns in the next three years.”

Meanwhile, ATB’s Toner holds an even more optimistic view about Shopify; which stems from what he refers to as the tech giant’s “layers of growth." He has a "buy" rating and a price target of $2,500 for the Canadian listing.

As Shopify builds out its ecosystem for merchants and adds features such as logistics and shipping services, each of those will add to the bottom line, said Toner.

He added that Shopify’s platform “travels well internationally,” allowing for continued expansion in global markets.

“You see in technology often there’s a ‘winner takes most’ type of dynamic. And the larger the leader becomes, the more difficult it becomes to dislodge them. So, at this point, Shopify is in a very strong position,” Toner said.


Despite the praise many analysts heap onto Shopify, not all of them are convinced.

One of the most bearish analysts on the company is Dan Romanoff with Morningstar. His 12-month price target on the firm’s U.S. shares is US$856.82.

Despite new tools for vendors and the ability to expand internationally, Romanoff said he doesn’t see the company growing at its current explosive pace forever.

“I’m not willing to believe that far down the road that they’re still growing at that rate,” he said in an interview. “You have to look at a 20-year [discounted cash flow] and say, in 20 years, their revenue is still growing by 25 per cent and their operating margins are 30 per cent? That’s not a level they’ve ever talked about, it’s not a level any of their peers that have come before them in the e-commerce area have done, so that seems unlikely to me.”

“When you start blowing this out into the longer term and start contemplating what Shopify looks like in 10-20 years, I think that’s where the real disconnect is,” he said.

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