Here’s why Shopify dropped on Wednesday: National Bank

It wasn’t the best Wednesday for fans of Shopify (Shopify Stock Quote, Charts, News, Analysts, Financials NYSE:SHOP) as the market reacted poorly to the company’s latest quarterly results. Poring over the evidence was National Bank Financial analyst Richard Tse, who delivered a post-mortem to clients on Wednesday, saying he still likes the company and stock but a pullback in tech is cause for a drop in his target price.

Canadian e-commerce company Shopify released its fourth quarter 2021 results on Wednesday, headlined by sales of $1,380.0 million, representing a 41 per cent year-over-year increase, and adjusted net income of $172.8 million or $1.36 per diluted share compared with $198.8 million or $1.58 per diluted share a year earlier. For the full 2021 year, revenue was up 57 per cent to $4,611.9 million and adjusted net income was $814.4 million or $6.41 per share compared to $491.3 million or $3.98 per share for 2020. (All figures in US dollars.)

In its guidance for 2021, Shopify said it expected revenue growth to be “lower in the first quarter of 2022 and highest in the fourth quarter of 2022,” citing poor comps between the first half of 2022 and the accelerated, COVID-related adoption of e-commerce over the first half of 2021, a revision of contract terms with partners that will see a headwind over the first half of 2022 and sales and marketing investments that aren’t expected to bear fruit until later in the year.

“We are emerging from the sprint of these last two years even stronger and more ambitious, since the accelerated leap into digital commerce means we can go farther faster for merchants and buyers alike. As the commerce engine for independent brands who want to build a direct connection with their customers and to sell everywhere, whether it’s on mobile, on Main Street, or to buyers in cities you’ve never heard of, we head into 2022 energized by what we can build with the unique combination of merchants, ecosystem and top talent we have today,” said Shopify President Harley Finkelstein in a press release.

Looking at the Q4 results, Tse deemed them in-line with estimates. Shopify’s reported Merchant Services revenue was $1,029 million, which was above Tse’s estimate at $960 million and the consensus call for $981 million. EPS of $1.36 per share was a hair lower than Tse’s estimate at $1.39 per share.

Along with a market-wide turn away from growth names in sectors like technology, Tse said SHOP’s share price looks to have suffered on Wednesday from a change in the company’s strategy regarding its fulfillment network. Tse said while management’s initial plan was to overlay a network across its fulfillment partners, it has now decided to own and run more of the major fulfillment hubs, a move which the analyst figures will increase capex by about $200 to $500 million compared to the previous target of $1 billion.

“According to the Company, the change in approach is the result of what it’s learned from prototyping its fulfillment model that had them concluding they would need such change to ensure quality two-day delivery for 90 per cent of the U.S. The reality is that such a change is different from the initial plan for fulfillment, and in the context with the market for tech stocks today, the change is obviously viewed as a blemish,” Tse said.

“Bottom line, given the sentiment change away from high growth (valuation) tech stocks which offers no passes in the short-term for any blemishes, the combination of (1) just in-line results; (2) no firm guidance; and (3) a change in strategy in SFN is why we’re seeing the big pullback at the time of writing,” he wrote.

Looking ahead, Tse is calling for Shopify to generate 2022 revenue and adjusted EPS of $5,861.5 million and $7.68 per share, respectively, and 2023 revenue and adjusted EPS of $7,225.3 million and $10.64 per share, respectively.

With the update, Tse has reaffirmed his “Outperform” rating on SHOP but reduced his target price from $2,000.00 to $1,500.00, which at press time represented a projected one-year return of 104.1 per cent.

Tse said looking beyond the short terms bumps in the road, there’s still lots of runway left  for Shopify and the company has a number of internal growth drivers such as International, Shopify Fulfillment Network, Shopify Plus, Shop Pay, Installments and POS Pro, with Tse seeing these as collectively not reflected in the stock price.

“We continue to like SHOP and believe it remains well positioned for outsized growth at scale with multiple incremental growth drivers which collectively are not reflected in the stock price. Yet, we also recognize the entire technology sector has seen a material valuation re-rating, and as such, we’re revising our target to reflect that,” Tse wrote.