Shopify stock: ATB Capital breaks down the good and the bad

Is Shopify (Shopify Stock Quote, Chart, News, Analysts, Financials TSX:SHOP) an unstoppable machine or just a run-of-the-mill overvalued stock?

ATB Capital analyst Martin Toner says he has gotten a lot of feedback since he downgraded the stock earlier this month and he felt it would be instructive to share it with clients in a research update December 20th.

“On December 6, given the low return to our target price, we changed our rating on Shopify from Outperform to Sector Perform for the first time in our three years covering the company. While the top of funnel data provided at the investor day implied accelerating GMV and merchant growth, it did not cause a change in our forecasts, which already call for significant growth. Our DCF looks for compound annual growth rates (CAGR)s for GMV and revenue of 15.6% and 20.1% through 2032, respectively. We estimate GMV of $838bn in 2032 and an attach rate of 3.54%, up from Q3/23 TTM GMV of $221bn and an attach rate of 3.04%.

The analyst characterized what has taken place in the time since his downgrade.

“The two weeks since the investor day featured a typical “sell the news” reaction, followed by a dovish, shareholder friendly pivot by the Federal Reserve (Fed) and a rally that has yet to weaken. The return to our target is now just 0.5%. We have solicited investor feedback in the two weeks since the investor day.

As for positive comments about Shopify, the analyst says they generally fell into three categories.

• The day was a reminder that CEO Tobi Lütke is a unique, and visionary leader. In general
confidence in the management team is high.
• New data shared at the investor day, while imprecise, implied GMV and revenue growth
acceleration.
• It is easy to undervalue, above average, long duration growth and while expectations are for
Shopify to grow below 30% from here, investor confidence in the duration of growth is high.
• The option value of Shopify’s strategic high ground is difficult to value. Investors believe SHOP
PAY, the SHOP APP, rewards-based retention strategies and advertising revenue all have
interesting option value.

And for comments that were not positive or “miscellaneous”, Toner says there were several.

• There was not enough granularity to be confident in the path to capturing more of the TAM.
• Building out sales, marketing and customer support for international growth will be
challenging.
• Valuation is ignoring that merchant solutions is dependant on retail spending and is highly
cyclical and dependant on a healthy consumer. If you use a payments company valuation for
merchant solutions revenue, the current price is unjustified.
• It will take time to land and expand with large enterprises and the attach rate could suffer,
negatively impacting revenue growth.
• Shopify’s gross margin profile (52.6% in Q3/23), puts a ceiling on operating margins at scale
given necessary research and development and sales and marketing expenses.
• How much of Shopify’s value proposition is available to Offline Retailers, who Shopify
considers ~50% of the new $849bn TAM?
• What is the value proposition for business to business (B2B) GMV? A customer example could
help investors understand the potential here?

With this report, Toner maintained his “Sector Perform” rating and one-year price target of (C) $105.00 on SHOP, implying a return of 0.5 per cent at the time of publication.

The analyst thinks SHOP will post EBITDA of negative $1.38-billion on revenue of $6.98-billion in fiscal 2023. He expects those numbers will improve to EBITDA of positive $818-million on a topline of $8.69-billion the following year.