Shopify staying on course, National Bank says

Strong second quarter results for Canadian e-commerce giant Shopify (Shopify Stock Quote, Chart, News NYSE:SHOP) have prompted National Bank Financial analyst Richard Tse to reiterate his “Outperform” rating and target price of US$2,000/share for a projected 29.7 per cent return in his latest analysis on Wednesday.

Ottawa-headquartered Shopify provides a cloud-based, multi-channel commerce platform designed for small and medium-sized businesses. With subscription solutions and merchant solutions, Shopify’s software is used by merchants to run their business across all their sales channels, including Web and mobile storefronts, physical retail locations, social media storefronts and marketplaces.

Shopify’s quarterly revenues crossed the $1 billion threshold for its second quarter 2021, delivered on Wednesday, driven by better than expected revenues in subscriptions ($334 million against consensus projection of $327 million) and merchant services ($785 million against consensus projection of $727 million), leading to a record gross merchandise volume (GMV) report of $42.2 billion, a 40 per cent year-over-year increase.

“We’ve increasingly been of the view that despite reopenings, we expect some permanency in the market shifts for commerce (online and offline) towards broader omnichannel platforms,” Tse said. “Shopify saw this in its own data where GMV in its UK segment grew faster than Shopify’s aggregate GMV and above pre-COVID levels, suggesting that online and in-store commerce are becoming less mutually exclusive.”

In analysing Shopify’s strong second quarter results, Tse pointed to a number of key factors, including the emergence of the company’s Shop app as a mobile shopping portal, an increased take in merchant services to indicate merchants are adopting the platform’s newer features. 

One such feature is Shopify’s Point of Sale (POS) Pro platform, which has seen significantly more uptake in retail locations during the COVID-19 pandemic, with the company suggesting 63 per cent of brick-and-mortar merchants in English-speaking geographies adopted POS Pro, up from two per cent prior to the pandemic.

Shopify has also had more merchants become Shopify Plus members, with the service generating $25.2 million in monthly recurring revenue (MRR) for the company to mark a 52 per cent year-over-year increase, as well as accounting for 26 per cent of the company’s MRR for the second quarter. Notably, Shopify Plus welcomed a number of major brands to its platform including ALDO, McCormick, Nestle, and Netflix.

“Shopify fired on all cylinders in our second quarter, keeping our merchants well equipped to seize the opportunities presented in a post-pandemic retail era,” said Amy Shapero, Shopify’s Chief Financial Officer in the company’s July 28 press release.

“As consumer spending remained strong, our merchants thrived and extracted more value from our platform, contributing to our rapid growth. We built on our momentum, making significant updates to our platform infrastructure, expanding strategic partnerships, and advancing our portfolio of growth initiatives to future-proof the success of tomorrow’s entrepreneurs,” Shapero said.

After Shopify reported $2.93 billion in revenues in 2020, Tse projects that number to double by 2022. His 2021 projection of $4.57 billion in revenues would represent a 56 per cent year-over-year jump if expectations are met, while he forecasts 2022 revenues to reach $5.71 billion.

However, Tse foresees Shopify’s adjusted EBITDA fluctuating instead of growing in proportion to revenues, projecting a jump to $710.6 million in 2021 from 2020’s reported $454.5 million, but Tse forecasts a drop to $670.3 million in EBITDA for 2022, leading to adjusted EPS values of $6.25 for 2021 and $6.00 in 2022.

Tse has favourable projections of Shopify’s liquidity ratios, forecasting the cash flow from operating activities to jump from $425 million in 2020 to $651 million in 2021, then to $712 million for 2022. Free cash flow is projected to enjoy a similar hike, moving from $383.2 million in 2020 to an estimated $621.1 million in 2021 and $691.1 million in 2022, which would give the company $5.42 in free cash flow per share.

A key valuation figure is forecast to drop in the next two years, with the EV/Sales multiple falling from the reported 64.4x in 2020 to 41.3x in 2021, followed by another projected drop to 33x in 2022.

In late June, the company hosted a virtual Shopify Unite conference, where it unveiled updates to its core platform, custom storefronts, metafields and other custom content, as well as upgrades to its checkout and developer options.

Tse believes Shopify is staying on course in its growth, even suggesting the company is still in the early stages of scaling its operations. 

“In our view, Shopify remains a leading disruptor and we believe upside in the stock will come from organic growth via incremental growth drivers like International, new Merchant Services like SFN, Shopify Plus (larger enterprises), Shop, Shop Pay, expanding channel partnerships (like Facebook and Google) and now POS Pro for brick-and-mortar retail,” Tse said.