Shopify’s valuation give us pause on this amazing company, says PI

Although he still believes in the company’s fundamentals, PI Financial analyst Gus Papageorgiou has words to say about the current valuation for Shopify (Shopify Stock Quote, Chart, News TSX:SHOP), arguing in a corporate update to clients on Thursday that SHOP fans should be cautious over the short term.

Canadian e-commerce company Shopify will be submitting its third quarter financial results next Tuesday, October 29, with the expectation being one of strong revenue and earnings both for the Q3 and in guidance for the upcoming fourth quarter, SHOP’s traditionally strongest quarter of the year.

For his part, Papageorgiou is calling for Q3 revenue of $382.1 million, up 41 per cent year-over-year, which is in line with the consensus and Shopify’s own guidance, and for earnings per share to triple from a year earlier. The analyst says that Merchant Solutions should grow faster than the overall business at 46 per cent, while he expects guidance for Q4 to come in at EPS of $0.08 per share on revenue of $472.6 million. (All figures in US dollars unless where noted otherwise.)

For the year, Papageorgiou says that SHOP could hit $1.6 billion in revenue, which is roughly five per cent ahead of his and the Street’s expectations, although Shopify has a habit of guiding conservatively and thus may peg the year at about $1.57 billion.

With his update, Papageorgiou is maintaining his “Buy” recommendation and C$492 target price, which translated into a projected return of 22.8 per cent at the time of publication.

At the same time that he is holding his “Buy” rating, the analyst says that he “would prefer to take action after the quarter,” arguing that at 18.0x EV/Sales the stock is nearing record highs. Papageorgiou contends that even with a beat in the quarter, he thinks that there is no more room for multiple expansion and that shares will face a challenge rallying in the short term.

“We believe Shopify has an unassailable competitive position in a market that is almost immeasurable with a highly compelling business model. In our opinion there are only a handful of companies on the planet that could rival Shopify’s competitive positioning and growth,” Papageorgiou says.

Shopify valuation is tricky…

“Where we are somewhat cautious is the valuation. Here we believe investors need to be a little cautious in the short term because the shares could easily move from trading at 20x+ EV/Sales to 15x, without much warning,” he says.

The analyst attributes Shopify’s expanded multiple to a number of factors: short covering, index exposure and growing acknowledgement of the strength of the company and business. He thinks that the recent share offering has allowed short sellers to cover and that most managers that wanted exposure are now there.

“There is still, we believe, broad acknowledgement of the Company’s strong position. However, with the first two influences largely waning, we expect the trading range will likely revert back to the 10-15 range,” Papageorgiou writes.

“Overall, we believe Shopify is a must own name. 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 the business model will deliver strong profitability over time,” he writes.