National Bank maintains Outperform rating on Shopify in wake of Citron short report

In the wake of a controversial short recommendation that sent shares of the stock reeling, National Bank Financial analyst Richard Tse is sticking to his guns on Shopify (Shopify Stock Quote, Chart, News: TSX, NYSE:SHOP).

On Wedenesday, Citron issued a short report claiming Shopify was a “a completely illegal get rich quick scheme” and claimed its affiliate program is primarily populated not by Small and Medium Sized businesses, but by “bloggers and influencers” who don’t disclose they are being paid by Shopify. Comparing the company to Herbalife, the report, entitled “Citron exposes the Dark Side of Shopify” put an immediate price target of $60.00 on the stock, which Tuesday closed at $119.00.

“If you ever read on the Internet a way to become a millionaire working at home- it probably isn’t true,” the Citron report concluded. “As an investor if you believe that someone can buy Facebook ads and become a millionaire- than buy Facebook stock. We are forwarding all of our information (hundreds of pages) to the FTC and we expect Shopify to face the same scrutiny as the many companies of the past who sell dreams to unsuspecting customers.”

Tse says the Citron report may represent a buying opportunity as he thinks the chances of FTC responding to Citron’s report are slim.

“In our view, we can’t unequivocally rule out that this negative report will not surface some regulatory scrutiny even if we think it’s remote,” the analyst said in a report to clients Thursday morning. “In the short-term, there’s little doubt it will weigh on the stock despite what we believe to be an unchanged fundamental outlook. Beyond that potential short term volatility, we think it will also open a window for longer term investors who may have missed the massive run in this name.”

With regards to the “bloggers and influencers” Citron call into question, Tse says those elements represent a very minor part of the overall revenue mix for Shopify.

“Here’s our take,” Tse says. “In our view, what’s at risk when it comes to the financials? We think it’s essentially what we’d call transient subscribers who do not represent a meaningful portion of value for Shopify. Take the following – we estimate Shopify Plus, the Company’s enterprise offering represents +18% of MRR with +75% from what we’d call operating SMBs or non-transient subs. That means those transient subs would account for say 5-10% of revenue. Of note, we’d characterize those transient subscribers also have a lower follow-through rate but represent a proportionally higher proportion of the company’s Merchant base. The reality is that those subs are only paying $29/month or using a 14 day free trial. We had baked that transient group into our forecasts at a 25% churn rate. As such, even if Shopify had to change its marketing approach, we doubt it would have a considerable impact on the revenue base.”

In a research update to clients today, Tse maintained his “Outperform” rating and one-year price target of (U.S.) $120.00 on Shopify, implying a return of 16 per cent at the time of publication.

Tse thinks Shopify will generate EBITDA of (U.S.) $7.0-million on revenue of $655.0-million in fiscal 2017. He expects those numbers will grow to EBITDA of $34.7-million on a topline of $962.7-million the following year.