Shopify still has upside, says Paradigm Capital

Its stock has nearly doubled from its IPO price, but Paradigm Capital analyst Kevin Krishnaratne thinks there is still money to be made on Shopify (Shopify Stock Quote, Chart, News: TSX:SH, NYSE:SHOP).

In a research report to clients today, Krishnaratne initiated coverage of Shopify with a “Buy” rating and a one-year target price of (U.S.) $35.00, implying a return of 17 per cent at the time of publication.

Krishnaratne says Shopify is disrupting the retail industry and has barely scratched the surface of what it can do. He thinks the company’s merchant base of about 243,000 customers can be expanded by its leadership role in high growth social and mobile channels. The analyst thinks a new focus on high ARPU enterprise customers should improve the company’s economics, but may be offset in the short term by agressive investments into R&D in the short term. This investment into its future, however, will enable Shopify to generate predictable free cash flow generation over the long run, says Krishnaratne.

Krishnaratne explained the simple reasons he thinks the Ottawa-based company is having success.

“What we like about Shopify is that it is well aligned with the idea of the consumer journey, where purchase decisions are influenced over time and across various online and offline sales channels,” says the analyst. “Shopify also holds a high regard for simplicity in its solutions and pricing to ensure that running a business is an enjoyable experience so merchants can focus on their core competencies. We view Shopify’s platform as an essential utility for merchants who rely on it as they grow in size, in turn driving success for the company.”

Krishnaratne thinks Shopify’s revenue will grow from $205.2-million in fiscal 2015 to $328.2-million the following year, and to $446.5-million in fiscal 2017.