Lots more room to grow for Shopify, says National Bank

National Bank analyst Richard Tse continues to like Canadian e-commerce giant Shopify (Shopify Stock Quote, Chart, News NYSE:SHOP), reiterating his “Outperform” rating and target price of $2,000/share for a projected return of 36.8 per cent in an update to clients on October 28.

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.

Tse’s latest analysis comes after Shopify reported its third quarter financial results, which Tse noted to be just shy of initial projections despite some hesitation on account of challenging year-over-year comparable figures.

“In our view, that had a lot to do with remarks from the company’s conference call which reinforced numerous and incremental growth drivers to this name – with execution at or above the Company’s expectations,” Tse said. “It’s our view that this outlook countered the slight shortfall in the Q3 results.”

The company’s quarterly results were headlined by $1.12 billion in revenue, which marked a 46 per cent year-over-year increase, though it was just below Tse’s expectation of $1.14 billion. (All figures in US dollars.)

“The strength of Shopify’s flywheel was on display within the more normalized spending environment we saw this past quarter, as more merchants used more of our platform to start and grow their businesses,” said Amy Shapero, Shopify’s Chief Financial Officer in the company’s October 28 press release. “Our results show that Shopify is executing well, giving our merchants the tools they need to compete in differentiated ways in a growing number of markets. We remain focused on simplifying commerce for our merchants so they can take full advantage of what digital makes possible and reimagine retail.”

Tse provides a number of key takeaways in his analysis, most notably the company’s commitment to a cross-border product through the launch of Shopify Markets, which is expected to help merchants localize customer experiences in new markets while being able to manage their global business within Shopify.

Shopify also launched its Global ERP program, which allows companies to build direct integrations into Shopify’s Apps program, with initial onboarding partners including Microsoft, Oracle NetSuite, Infor, Acumatica, and Brightpearl. 

The company also brought in new Shopify Plus merchants in the quarter including Logitech, Kenneth Cole, and Frank & Oak, helping to drive an increase to 28 per cent of the company’s revenue coming from MRR compared to 26 per cent in the previous quarter.

With the quarter coming in slightly below expectations, Tse has also made adjustments to his more immediate and long-ranging projections, lowering his fourth quarter revenue expectation to $1.3 billion from his previous estimate of $1.37 billion, and his overall estimate for 2021 revenue to $4.54 billion from his previous projection of $4.61 billion, though the revised figure would still represent potential year-over-year growth of 54.9 per cent.

Looking ahead to 2022, Tse has lowered his revenue projection to $5.8 billion from his previous estimate of $5.92 billion, though the new projection is still a projected increase of 27.8 per cent over the revised 2021 projection.

Tse’s EBITDA projections and margins increase for 2021, with an estimate of $728.1 million in place for 2021 to produce a margin of 16 per cent. However, he projects both the margin and overall EBITDA to drop in 2022, projecting a figure of $711.9 million for a reduced margin of 12.3 per cent.

Tse has also altered his projections for Shopify’s EPS figures, as he has lowered his 2021 EPS estimate to $6.22/share from his initial projection of $6.67/share, while the 2022 projection is now $5.95/share instead of his initial $6.47/share projection.

Tse forecasts Shopify to be in a continuously improved position with regards to its EV/Sales multiple, which he forecasts to drop from the reported 60.4x in 2020 to a projected 39x in 2021, then dropping again to a projected 30.5x in 2022.

Meanwhile, he also projects constant growth in Shopify’s free cash flow per share multiple, increasing from the reported $3.00/share in 2020 to a forecasted $3.65/share in 2021, then taking a spike to a projected $4.89/share in 2022. Concurrently, Tse projects the company’s free cash flow to trend upward in that time, projecting an increase from the reported $383.2 million in 2020 to a forecasted $466.1 million in 2021, then jumping again to a projected $623.8 million in 2022.

Overall, Tse reiterates his belief that Shopify is still in its early stages of scaling.

“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.

Overall, Shopify’s stock price has continued to grow, yielding a return of 39.8 per cent on the New York Stock Exchange for the year to date and hitting a high point of $1,643.32/share on July 23.