Shopify (SHOP) Sell Rating

15 June 2020

by Rob Zdravevski

Stock Code: NYSE: SHOP

Current Price: US$743

Target Price: US$ 530

Notwithstanding competitors such as Amazon and Microsoft coveting Shopify’s market presence, my view is that the market has priced in such extraordinary growth which suggests that this is “as good as it gets” for Shopify’s stock price in the near to medium term.

The advance in Shopify’s stock price has been accentuated in the past 4 months due to an acute rise in e-commerce transactions and the detrimental effect that COVID-19 has had on “bricks and mortar” retail.

For some context, Shopify’s Q1 2020 financials (released May 6th, 2020) reported growth rates (when compared to the same quarter a year ago) of a 25% increase in their Monthly Recurring Revenue, a 47% increase in Total Revenue, 42% rise in Gross Payment Volume and a 44% increase in Gross Profit.

All the while, its 1st quarter Operating Loss was $73 million and booked a Net Loss of $31 million.

At the very least I would expect some mean reversion in the stock price to reflect a combination of tempered or perhaps “normalised” growth rates and some “catch-up” on its valuation because its difficult to warrant “new” dollars being invested at its current $88.6 billion market capitalisation.

My 2020 estimate is for Shopify to produce Revenue of $2.11 billion, an EBITDA of $55 million, EBIT of $2 million and a Net Loss of $188 million.

As you can see margins aren’t impressive and a P/E ratio doesn’t exist.

Shopify does has $2.3 billion cash on its books which makes its Enterprise Value $86.3 billion……giving it an EV/EBITDA Ratio of 1,569.

Although I am a fan of the Andreessen Horowitz dictum that “Software Is Eating The World”, how can one make a “buy” case for this stock at these valuations ?

Furthermore, on April 1st, 2020, the company announced that it won’t provide any FY 2020 financial guidance or expectations to analysts and investors citing uncertainly due to rising unemployment and the COVID-19 pandemic.

Confusingly, I believe it has been the onset of COVID-19 which helped its stock price double over the past 3 months.

With a current stock price of US$ 742.58, my initial target price is $530, while I’ll assess the probability of it trading to $455 as we near the next quarterly earnings result.

Shopify Q1 2020 Financial Results

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Rob Zdravevski

Rob Zdravevski

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