Shopify is a must own stock, says PI Financial analyst Papageorgiou

Although he contends that valuation remains challenging, PI Financial analyst Gus Papageorgiou says Canadian tech darling Shopify (Shopify Stock Quote, Chart, News NYSE:SHOP) is a “must own” name based on its compelling business model and unassailable competitive position.

The analyst on Wednesday launched coverage of the stock with a “Buy” rating and C$492 target price, representing a projected return of 17.3 per cent at the time of publication.

Be aggressive on sell-offs, that’s the tone for Shopify, says Papageorgiou, who argues that the e-commerce company, which generates revenues through services and monthly fees charged to its Merchant customers, has evolved beyond simply providing a SaaS service, with now Shopify Payments, Shopify Shipping, Shopify Capital and Shopify Fulfillment Network.

And its position in the market is rock solid, says the analyst.

“Based on its scale, ecosystem and data set no one can, we believe, rival the company’s offering. Shopify’s data set is particularly unique as it has billions of data point on how small Merchants operate on the Internet. No other organization has this data set,” said Papageorgiou.

“At best we believe Shopify’s direct competitors such as Big Commerce and Volusion maintain under 200,000 combined customers. Shopify’s scale affords it several competitive advantages. Firstly, it is much better able to invest in both sales and marketing and R&D. Last year Shopify spent $131.3 million on advertising alone, which is, we believe, bigger than the revenue for either Big Commerce or Volusion. In addition the Company can invest in technologies like augmented reality which have proven to help conversion rates (the rate at which on-line shoppers make a purchase) for many sites. These kinds of investments are likely out of reach for these smaller players,” he said.

Shopify ended last year with 820,000 Merchant customers, with that number likely to have passed one million by now, says Papageorgiou, who claims that Shopify’s addressable market is huge and its business model compelling.

“As customers become more successful on the platform they switch to a variable rate plan and there is no upper price limit to that plan. Also, Shopify continues to launch new services such as fulfillment which should increase the sale of services to its customers. Finally, as a SaaS player, roughly 42 per cent of its revenue is recurring,” writes Papageorgiou.

The one downside to the name? Valuation. With the shares recently hitting an all-time high and trading at more than 20 times EV/Sales, the multiple remains “our key concern,” says the analyst.

Papageorgiou is valuing SHOP at 15x forward 12-month EV/Sales one year out, whereas the share have traded in a range between ten and 15x over most of the last three years.

Papageorgiou thinks Shopify will generate fiscal 2019 revenue and EBITDA of $1.610 billion and $101.4 million, respectively, and fiscal 2020 revenue and EBITDA of $2.375 billion and $271.6 million, respectively. (All figures in US dollars unless where noted otherwise.)

“Overall, we believe Shopify is a must own name,” the analyst said. “We would be much more aggressive on any sell-offs but would advise accounts to at least develop an initial position. We believe the long term growth for this Company is highly compelling and that the business model will deliver strong profitability over time.”