Analysts remain optimistic as Shopify (SHOP) stock falls


Shopify website on phone screen – Photo: Shutterstock

Shopify’s share price has been hammered over the past two days, but analysts are optimistic about the Canadian e-commerce giant’s bright future.

Analysts’ optimism belies the fact that many have lowered their price targets for the stock since Shopify, based in Ottawa, Ontario. (STORE) published its fourth quarter of 2021 earnings results Wednesday.

The stock closed down 11.63% in New York on Thursday after falling 17% on Wednesday when the earnings report was released. The price has fallen more than 50% since its peak in late November.

Shopify serves small businesses, providing an e-commerce platform that lets customers build websites that sell products online and offline.

Expanding distribution

Analysts have raised concerns about Shopify’s plan to expand its own expensive fulfillment system, known as the Shopify Fulfillment Network (SFN), to the United States. SFN will allow Shopify to operate more of its own warehouses and deliver products to 90% of the United States within two days of ordering.

The stock decline comes as Shopify’s revenue normalizes — but remains quite high — as the retail sector recovers from a sharp pandemic-induced downturn. The situation raised the question of whether Shopify has an economic moat – a distinct advantage that allows the company to protect its market share and profitability.

Analysts suggest that Shopify does indeed have a moat, and the company’s current pain will only be temporary.

Analysts lower their price targets

According to Bloomberg, more than 20 analysts lowered their target prices after the company revealed that full-year revenue growth would be less than the 57% gain achieved in 2021.

As a result, Shopify lost billions of dollars in market value. Despite the reduced price outlook, Shopify only has one sell rating, with 27 buys and 19 takes, Bloomberg reported.

“We’re moving the network model to higher capacity hubs, and we want to leverage more of it ourselves to better control quality, but also cost,” Shopify President Harley Finkelstein said during a briefing. appeal to analysts.

The three years, $1.2 billion (£880 million) The investment plan comes after the company canceled warehouse and third-party distribution center contracts in January.

Positive on SFN

“In a market hypersensitive to negative macro signals and higher/lower costs (free cash flow), (the earnings report) was a difficult impression,” Wedbush analyst Ygal Arounian wrote in a report by research he provided to Capital.com. “We remain positive on SFN, even if it takes longer to play out. We believe owning more shares will prove to be a winning strategy for Shopify and ultimately improve adoption and profitability over time.

He told BNN Bloomberg that Shopify’s business has been stellar despite “a lot of noise around the macro” and that the company has done “a phenomenal job” of capturing e-commerce market share.

The future of the company is to continue building a single platform that works very well for many e-commerce merchants, he added. Arounian expects Shopify to continue its great work in the years to come.

Lots of uncertainty

“There is undoubtedly a great deal of uncertainty around macro and consumer spending in 2022, and that uncertainty certainly warrants some caution,” he wrote in his report. “But Shopify remains incredibly well positioned to capture not just e-commerce, but retail growth in the coming years (which includes offline and social commerce), greater payment penetration, and accelerating international growth, among others.”

Arounian lowered his price target for Shopify to $937 from $1,270, but said the SFN plan is a “reset” — not a structural shift in the company’s core strength.

“We believe owning more shares will prove to be a winning strategy for Shopify and ultimately improve adoption and profitability over time,” Arounian wrote.

Morningstar analyst Dan Romanoff remains bullish on e-commerce despite lowering his price target for Shopify to $730 from $862 and CA$930 from CA$1,070 for stocks traded on the Toronto Stock Exchange as of Canada.

“We believe investors have lowered their expectations after reports from some other notable e-commerce companies,” Romanoff wrote in a report Morningstar provided to Capital.com.

Narrow-moat business

Romanoff called Shopify “a narrow moat company.” It lowered its growth and margin estimates for the company as Morningstar seeks “a new normal” for Shopify with the end of pandemic lockdowns and the company accelerating DFS construction.

“Given these two important moving elements, we remind investors of our very high uncertainty rating and note that we have seen stocks boomerang over the past two years to the point that we now view stocks as fairly valued rather than significantly priced. overvalued,” Romanoff wrote. “We continue to believe that DFS is likely to grow in popularity with customers and should help drive strong growth over the next decade.

“Furthermore, management’s decision to build and operate a network of its own distribution facilities does not surprise us. We also continue to see room for continued penetration of other merchant solutions services into the installed base, introduction of new solutions, and adoption of the Shopify platform as ways to grow revenue over time. time.

National Bank of Canada Richard Tse also wasn’t surprised by Shopify SFN’s growth plan.

But he told a Canadian newspaper The Globe and Mail: “Given the challenging backdrop for tech stocks, investors are unlikely to pass up short-term investors.”

A successful trimester was necessary

Given the current tech stock market conditions, Shopify needed a “successful quarter” to make meaningful near-term progress.

ATB Financial analyst Martin Toner said in a research note that Shopify’s investments should stabilize Shopify’s revenue growth after pandemic highs, e-commerce sales will continue to grow, and the company will gain more large share of customers and their wallets.

In a research note, Evercore ISI analyst Mark Mahaney called SFN “a big unknown.” Investor’s Business Daily reported.

“Now more than ever, investors will need to trust management to allocate capital effectively as announced investment levels may exceed investor expectations,” Mahaney wrote. “In this market environment where investors are prioritizing profitability and short-term cash flow, we’re not entirely surprised to see stocks fall hard.”

According to Canaccord Genuity analyst DJ Hynes, Shopify’s ambitious and costly delivery network ambitions have put the company on the offensive.

“We see the additional investment putting Shopify on the offensive, tackling a truly complex but painful part of the merchant-customer relationship,” Hynes wrote in a research note, The Globe and Mail reported. “If they are successful, it will become a much bigger business in the future.”

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