Software Pair Trade? Morgan Stanley Upgrades Shopify, Downgrades Citrix Systems

• Shopify Inc SHOP shares are down 23 percent since January 4, while shares of Citrix Systems, Inc CTXS have lost 12 percent.
• Morgan Stanley analysts upgraded the rating for Shopify from Equal-weight to Overweight, and downgraded Citrix Systems from Equal-weight to Underweight.
• Shopify is set to benefit from the expansion of its platform and its various partnerships, while Citrix Systems is struggling to sustain top-line growth, the analysts mentioned.

Shopify

Analyst Brian Essex reduced the price target for Shopify from $37 to $34. He mentioned that the company is one of the best players in the SMB retail vertical software market.

“Shopify substantially beat expectations for its first two quarters as a public company and the stock pulled back 53% since closing at its highs in early August,” Essex noted, while adding that the risk reward for investment in Shopify is very favorable at the current levels.

Despite having one of the highest growth rates, Shopify’s penetration still equates to only 2 percent of the merchants in its target markets. The company reported better-than-expected 3Q15 results with 93 percent y/y revenue growth and break-even cash from operations.

Shopify’s robust growth was driven by 69 percent y/y MRR growth, 101 percent y/y growth in GMV and robust y/y take rate expansion, Essex mentioned. He added, however, that there could be deceleration in the company’s revenue growth to 51 percent y/y next year.

While Shopify continues to expand its presence as a leading SMB storefront platform, it is yet to realize the full benefits of the recent enhancements of its platform, including shipping partnerships with several players. The analyst expects the company’s various partnerships to drive incremental organic and affiliate traffic.

Citrix Systems

Analyst Keith Weiss maintained a price target of $70 for the company. The analyst believes that Citrix Systems could be find it challenging to sustain top-line growth in competitive markets while cutting expenses.

Citrix Systems is implementing a restructuring plan aimed at achieving operating margins of at least 28 percent in FY16 and raising the same to at least 30 percent in FY17. Management is also aiming to reduce costs and expand revenues from 1-2 percent in FY16 to 4-5 percent in FY17.

Weiss sees an unfavorable risk reward for investment in Citrix Systems, given the concerns surrounding the ability of enterprise software firms to accelerate growth during periods of continued restructuring, heightened consumer expectations and a highly competitive environment.

“Using the high end of FY16/FY17 targets which call for revenue growth of 1-2%/4-5% and margins of 28%/30%, our SoTP analysis yields a range of $55-$72 per share based on FY17e EV/Sales and $58-69 based on FY17e EV/EBITDA,” the Morgan Stanley report stated.