Shopify is still undervalued, says National Bank analyst Tse

Canadian e-commerce company Shopify (TSX:SHOP, NYSE:SHOP) will be well-served by a recent round of financing, says Richard Tse, analyst with National Bank Financial Markets, who resumes coverage of Shopify with an “Outperform” rating and one-year target price of $160.00 US.

Last week Ottawa-based Shopify announced it had closed on a financing round in which the company issued 4.8 million share, netting $647.7 million US. Shopify says that it will use the proceeds to fund its growth strategies, which bodes well for the company going forward, says Tse in a note to clients on Monday.

“Overall, our investment thesis remains unchanged with the financing. If anything, we believe it puts Shopify in a better position to execute on its growth aspirations by providing flexibility to pursue multiple prongs of growth from organic to potential acquisitions,” says the analyst, who sees the extra funds going towards Shopify’s product development and international expansion, along with further penetration into the larger enterprise market with Shopify Plus.

The company beat analyst expectations in its Q4 2017 numbers, released on February 15, showing a topline of $222.8 million US, which represents a revenue growth of 71 per cent from the previous fourth quarter.

Tse says that with its market leading e-commerce platform and multiple points for growth, Shopify has a “long runway of opportunity” ahead of it.

“For some context, Shopify has about 609,000 merchants on its platform at the end of 2017,” says the analyst. “Globally, it’s estimated there are approximately 47 million small business merchants which the Company could target. That means Shopify has captured only around one per cent of that base. That’s not even taking into account the market opportunity should Shopify make a serious push into larger enterprises with Shopify Plus.”

Tse today gave SHOP a rating of “Outperform” and a risk rating of “Above Average.” He estimates a target price of $160.00 US, representing a return on investment of 17 per cent at the time of publication. Tse’s target price implies an EV/Sales of 10.8x estimated for fiscal 2019 and revenue and EBITDA estimated for 2018 at $1,000.1 million US and $14.9 million US, respectively.