E-commerce company Shopify (TSX,NYSE:SHOP) just saw a competitor get an upgrade in the form of Adobe’s acquisition of e-commerce platform Magento Commerce.
That deal is an incremental negative for SHOP, says analyst Blair Abernethy of Industrial Alliance Securities, who on Tuesday maintained his “Buy” rating and $145.00 target price. (All figures in US dollars unless otherwise noted.)
On Monday, software company Adobe Systems announced the purchase of Magento, already an Adobe partner, for $1.68 billion. The Magento platform currently counts Canon and Rosetta Stone among its customers (along with overlapping customers with Adobe including Coca-Cola and Nestlé SA) and processes more than $150 billion in gross merchandise volume.
Abernethy says the acquisition will join up Adobe’s strengths in content, data and marketing with Magento’s open commerce innovation, making it harder for Shopify to pull customers away from Adobe.
“We view this acquisition as an incremental negative for Shopify as Magento will now have significantly greater resources to develop, integrate, and market its mid-market e-commerce platform under the Adobe ecosystem,” the analyst says. “We believe that over the past two years Shopify Plus has been able to convert many customers off of the Magento platform, but, going forward, this source of new e-commerce customers may be more difficult to entice away from Adobe.”
Abernethy says that presently he is not changing his estimates for SHOP but will be tracking Adobe’s progress with Magento over upcoming quarters.
“In our view, Shopify can continue to rapidly increase its store count, add new products, and gain traction on Shopify Plus with larger retailers. We expect Shopify to continue to sustain a rapid organic growth rate for the next few years, thus justifying a premium multiple,” he says.
The analyst believes that long-term, Shopify will produce EBITDA margins of over 20 per cent but that the company’s focus will remain on growth and platform enhancement over the next few years.
Abernethy’s $145 target stems from a ~10x EV/Sales on his 2019 estimate, which compares to other high growth SaaS/e-commerce companies trading in the 7-9x EV/Sales range and best-in-class vendors at over 10x. His target represents a projected return of 4.4 per cent at the time of publication.