Shopify is still undervalued, RBC analyst says

The sky’s the limit for Shopify (Shopify Stock Quote, Chart, News NYSE:SHOP), says RBC analyst Mark Mahaney, who thinks the company’s naysayers just aren’t seeing SHOP’s potential for growth in the e-commerce space.

“These are the numbers that we cut and I think we’re largely right here. We think that about 2 per cent of global retail sales, excluding China, gasoline and cars, about two per cent of it is Amazon. If you do the same analysis on Shopify it’s about 0.4 per cent, as Shopify is about one-fifth the size of Amazon in terms of the total amount of volume of retail sales that occur on his platform,” says Mahaney, Internet analyst for RBC Capital Markets, who spoke on BNN Bloomberg on Monday.

“We think that this company has a chance to tap into an US$800-billion total addressable market…”

“So, you can add the two of them together and you still get less than three per cent of all retail sales, i.e., there’s plenty of room for them to continue to grow for a long time to come,” Mahaney said.

Shopify has been on another roll over the past few trading sessions, with the stock up 24 per cent since June 12 and now up a remarkable 132 per cent for the year so far. The Ottawa-based company last week announced a partnership that will see the retail giant add 1,200 Shopify sellers this year get access to Walmart’s customers via a dedicated Walmart online channel.

Shopify’s share price growth so far this year appears even more impressive when seen against the backdrop of two quarters of economic strife on a global scale, complete with raging unemployment and the devastation of some entire industries like airlines and leisure travel.

But the really notable contrast this year is between bricks and mortar retail, which was struggling even before COVID-19, and e-commerce as exemplified by names like Amazon, Wayfair and Shopify which have seen huge upticks in business as a result of the pandemic.

And more important than the success of these companies during the pandemic is the idea that many are forecasting that the COVID-19-inspired growth in e-commerce has only sped up a transition that was developing nonetheless.

“Shopify and Amazon benefit from the fact that, fortunately or unfortunately, they are structural winners from this COVID crisis,” says Mahaney. “We have seen an accelerating shift and we probably accelerated online retail sales by two years, accelerating shift to online channels, and both Shopify and Amazon benefit from that.”

“As far as I’m concerned, both companies can sustain premium growth, for the next three to five years at least,” says Mahaney.

Mahaney said while investors should be wary of extremely high multiples such as those found on Shopify, there’s likely still upside to the stock since the market has yet to price in all of its growth runway.

“On Shopify, we looked at three things: its total addressable market, its take rate potential and its operating margins,” Mahaney said. “We think all of those are are somewhat underappreciated by the market.”

“We have a US$1,000 price target on the stock. We think that this company has a chance to tap into an US$800-billion total addressable market,” the analyst added.