In a research report to clients today, Thadani initiated coverage of Shopify with a “Buy” rating and a one-year price target of (U.S.) $60.00, implying a return of 41 per cent at the time of publication.
Thadani says he is betting that Shopify’s history of outperformance will continue and that the company has earned its premium valuation.
“As investors start looking to 2018, we believe SHOP will begin to appear more attractive owing to the company’s rapid revenue growth,” he says. “On a 2018 basis, Shopify trades at ~5x EV/Sales, in-line with US and Canadian SaaS companies. Shopify’s relative EV/Sales valuation appears inexpensive compared to US & Canadian SaaS stocks, when taking revenue growth into account (2018 expected 30% vs. peers’ 20%). A second pushback is Shopify’s lower Gross Margin, which in our view could be a more valid reservation at current levels. On a 2018 EV/Gross Profit basis, Shopify trades at ~9x vs. peers at an average ~7x (with most trading at ~6-9x). Our $60/sh target implies ~7x 2018 EV/Sales, skewed to high end of peers, which embeds expectations of continued revenue outperformance. Shopify has a track record of beating revenue expectations. A negative surprise is an as yet unrealized risk. That said, sooner than expected profitability from operating leverage could be a meaningful positive surprise.”
Thadani believes Shopify will post EBITDA of $16.71-million on revenue of $559.29-million in fiscal 2017. He expects these numbers will improve to EBITDA of $53.49-million on a topline of $727.86-million the following year.
Thadani says Shopify is well positioned to continue to deliver organic revenue growth, pointing to new integrations and partnerships with the likes of Amazon, Twitter, Pinterest and Facebook, and a culture that focuses on continually improving its own offerings. The analyst believes the Ottawa-based company has a total addressable market of more than $10-billion in North America and $46-billion globally.
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