Shopify May Be Up Big Now, But Wall Street Hints Of Fleeting Success
Shares of Shopify Inc (NYSE: SHOP) were trading higher by more than 12 percent Thursday afternoon after the cloud-based commerce platform for small and medium sized businesses posted a better than expected second-quarter result.
Canadian-based Shopify saw its shares surge since its IPO in May. Shares traded as low as $24.11 and, nearly a month later, spiked as high as $42.13, but lost momentum once shares dipped below the $30 mark in mid-July.
Shopify reported an adjusted loss of $0.03 per share in the second quarter, exceeding the $0.09 per share loss analysts were expecting. Revenue of $44.9 million was also higher than the $38.1 million analysts were looking for. The company also issued guidance and expects its third-quarter sales to fall in a range of $47 million to $48 million, ahead of the $39.4 million analysts were estimating. Similarly, the company's full-year revenue guidance of $181 million to $183 million topped the $160 million analysts were looking for.
Stock Surges Past RBC, Cannacord's Price Target: Time To Sell?
Ross MacMillan of RBC Capital Markets initiated coverage of Shopify with a Sector Perform rating and $35 price target in late June.
According to MacMillan, a $35 price target assumes a "reasonable base line of success," which consists of a 12 percent market share in a 10 million merchant market worldwide by 2020. The analyst estimated the company only has a 1.6 percent share at this time, with 165,000 merchants.
With shares of Spotify flirting once again with the $40 level (shares hit an intra-day high of $40.25) and noticeably above the analyst's price target, the question investors need to be asking is whether or not further upside is possible.
Investors looking toward the Street's expertise have further reason to maintain a bearish stance. Analysts at Canaccord Genuity initiated coverage of the stock with a Hold rating and $30 price target.
"We are quite confident that Shopify will continue to execute in the top decile of public software companies," Richard Davis of Canaccord wrote in his initiation note in late June. "Our hesitation on rating has to do with the equally impressive ramp in the stock price since the IPO – a move that has taken the shares to a valuation that is quite high on a relative or absolute basis."
Davis continued that with 88 million fully diluted shares outstanding, the stock is trading at roughly 16x calendar 2015 and 12x calendar 2016 EV/revenue. At the time of publication, shares were trading at $31.32, making it "the most expensive software stock that we track (even adjusting for growth)."
In fact, Davis further argued that the stock is even more expensive when looking at its EV/gross margins, which are in the mid-50 percent range. The analyst further speculated that shares are expected to trade at a more attractive valuation "sooner than one might expect."
With that said, the analyst added that that shares could "easily" retreat to an "attractive" mid-$20s level in the current "brittle" stock market environment.
Davis also explored the opposing side of the trade and evaluated a "what if" scenario:
"Finally, we could be wrong in the short run because the likely upside quarterly results and very fast growth could overwhelm any natural multiple degradation that Shopify will inevitably see," the analyst wrote. "Therefore, you can make a semi-rational case that Shopify shares could go a bit higher over the next couple of quarters, at least until the VCs start pushing shares out on the market in distributions."
With all that considered, the analyst reaffirmed his bearish stance, arguing that he simply cannot justify a Buy rating on the "very promising," yet "very expensive" stock.
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Latest Ratings for SHOP
|Dec 2016||Oppenheimer||Initiates Coverage On||Perform|
|Nov 2016||BTIG Research||Initiates Coverage On||Buy|
|Oct 2016||Dundee||Initiates Coverage On||Neutral|
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