Shopify is heading higher, says National Bank

The numbers are lining up nicely for fans of Canadian e-commerce champ Shopify (Shopify Stock Quote, Charts, News, Analysts, Financials NYSE:SHOP), according to National Bank Financial analyst Richard Tse, who maintained an “Outperform” rating on the stock in a Tuesday report.

Shopify’s share price has bounced around recently and remains down about 21 per cent over the past 12 months — and that’s not even taking into consideration much of the dramatic fall from grace that began in November 2021, where SHOP went from about $150 per share to about $25 at its lowest point.

Currently in the high-$40s, Shopify remains a stock surrounded by a lot of questions, primary among being a concern about the next leg of growth and from where it’s going to come. 

Tse, who recently met with SHOP’s new CFO Jeff Hoffmeister, spoke of the way forward for the company.

“We can tell you having sat in on a number of meetings with investors that there was one common question on investors’ minds and that’s how Shopify’s plethora of markets is expected to scale as we look ahead – with numbers,” Tse wrote.

“The reality of it all is that no one knows for sure – not even Shopify,” he said.

But even without a crystal ball, Tse said there some reasonable and conservative assumptions to be made on SHOP’s progress over the next half-decade, starting with its Merchant Solutions segment, which commanded about 73 per cent of the company’s revenue in 2022. 

Tse argued that looking at the expected gross merchandise volume (GMV, the amount transacted on Shopify’s platform) the forecast is for it to grow to $350 billion by 2027, implying a CAGR of about 12 per cent. Paired with a projected take rate of 3.5 per cent, Tse is expecting Merchant Solutions to reach about $12.3 billion in revenue in 2027 compared to $4.1 billion in 2022.

At the same time, Tse said Shopify’s total addressable market (TAM) in Merchant Services for all its various features, including Shopify Payments, Shop Pay, Markets, Shopify Capital and the Shopify Fulfillment Network, is currently at about $475.3 billion, with a current penetration rate of 0.87 per cent. Tse sees that as likely to rise to 2.58 per cent by 2027, a scenario which he believes is reasonable and still leaves room for potential upside runway for SHOP.

Putting it all together and thinking about valuation and share price, Tse said total revenue including subscription revenue would be about $14.9 billion in 2027 or 1.65x greater than 2022’s revenue of $5.6 billion. Assuming no multiple expansion, with SHOP currently trading at 7.9x NTM Sales and using the company’s current Net Cash of $4.1 billion and diluted shares outstanding of 1.3 billion, the implied 2027 share price would be $96.54, representing a 116 per cent increase on the current share price.

“We believe Shopify remains a leading Commerce disruptor and believe upside in the stock will come from a number of different incremental growth drivers such as 1) International; 2) increased take rate with new services; 3) fulfillment (SFN); 4) large enterprise (Shopify Plus); and 5) POS (omnichannel),” Tse wrote.

With his report, Tse maintained a 12-month target of $60.00, which at press time represented a projected return of 34.0 per cent.