Morgan Stanley Says Shopify Doesn't Deserve A 'Full SaaS Multiple'

Shopify Inc SHOP is a best in class e-commerce platform, but it's a mistake to value the stock as if it's a pure-play software-as-a-service company, according to Morgan Stanley.

The Analyst

Morgan Stanley's Brian Essex downgraded Shopify from Equal-Weight to Underweight with a price target lowered from $209 to $173.

The Thesis

Shopify's stock is trading at around 12.6 times EV/Sales on fiscal 2020 revenue estimates, which Essex said is mostly in-line with U.S. based SaaS high-growth companies. Shares have also gained 81 percent since the start of 2019 versus the high-growth SaaS group at 47 percent. The problem for Shopify is the magnitude of outperformance is "unwarranted" and the company's status as being a pure SaaS company may not be accurate.

Approximately 57 percent of Shopify's revenue is transaction-based, which Essex said in a note is different from SaaS companies that are typically recurring. Investors shouldn't have to pay SaaS multiples for transaction-based models that not only have very little recurring characteristics, but can be "more punitive" to growth, the sustainability of earnings and cash flow.

Shopify's other major business unit, Subscription Solutions, does warrant a premium multiple to comparable SaaS peers, but Essex said this doesn't imply Shopify as a whole warrants a premium multiple.

Price Action

Shopify's stock traded around $251.5 per share Tuesday afternoon.

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Photo courtesy of Shopify.