Shopify may be expensive but it’s still a buy, Canaccord Genuity says

Shares of Shopify (Shopify Stock Quote, Chart, News: NYSE:SHOP, TSX:SHOP) may be on an extended run, but is there still more upside to Canada’s e-commerce sensation?

Definitely, says analyst Richard Davis from Canaccord Genuity, who insists that despite the sky-high valuation, Shopify’s continued high-pace growth means the stock is still a buy.

This week, Ottawa-based online and mobile retailer Shopify reported its Q4 2017 earnings, boasting a revenue increase of 71 per cent year-on-year to go along with a net loss of $3 million USD. The company ended the quarter with roughly 609,000 merchants on its platform, driving a 62 per cent year-on-year uptick in monthly recurring revenue.

It’s that tension between profit margins and the drive to scale up that Davis sees as a continuing theme for Shopify.

“Growth salves the nerves of most investors in the end, but at some point, this firm, like all before it, will have to commit and be held accountable to a consistent ramp in margins,” says Davis in a report to clients on Thursday. “That point will probably be sometime in 2019. Until then, high growth is likely to propel this stock higher.”

While revenue exceeded expectations in Q4, revenue growth turned out to be Shopify’s slowest since its IPO debut in 2015, leading investors to wonder whether the company might be bumping up against a limit. Davis is not yet convinced that this is the case.

“For investors with multi-month time horizons the single important question is whether Shopify’s efforts to grow at a best-in-class pace is becoming incrementally more difficult – and to what extent is this conclusion formed by unimpressive profit guidance for 2018,” he says. “On that front Shopify is very unlikely to be struggling with competition.”

“There’s no way to mask the fact that SHOP shares are expensive,” says the analyst. “The stock currently trades at roughly 14.2x and 10.5x EV/revenue on our revised C2018/19E, making it the most expensive stock in the entire software universe.”

Davis maintains his “Buy” rating, with an increased price target of $155 (up from $115), which represents a 13.4 per cent return at the time of publication.