SHOP stock still has upside, Roth says

Following a fourth quarter merchant check, Roth MKM analyst Darren Aftahi has maintained his “Buy” rating on Shopify (Shopify Stock Quote, Chart, News, Analysts, Financials NYSE:SHOP).

The analyst says SHOP is not a cheap stock and it needs to continuously improve its margins to justify the high multiple it trades at.

“Our 4Q merchant checks suggest modest growth acceleration from our prior quarter survey, with median and mean growth rates of 15.2%/17.1%, respectively,” Aftahi wrote. “Average growth would be 400 bps faster than our modeled 13% GMV. Beyond 4Q outperformance, we believe SHOP needs to demonstrate meaningful continued operating leverage in 2024 over our ~17.5% average 2H23 NG operating margin estimates, in order to sustain the multiple at which it currently trades (the mid-$80s represents the upper end of historical multiple ranges).”

The analyst July 19 maintained his “Buy” rating and price target of (US) $85.00 on SHOP.

Aftahi thinks Shopify will post EPS of $0.74 on revenue of $6.99-billion in 2023. He expects those numbers will improve to EPS of $1.30 on a topline of $8.1-billion the following year.

“Based on our survey work, we expect a stronger topline quarter relative to what we have in print (13% GMV growth),” the analyst added. “Average growth was around 17.1% or ~100 bps faster than last quarter’s survey, and ~400 bps above where we are in print. If we are directionally correct, we would expect some profit upside flow through as well. Having said all that, SHOP has had a strong run in 2023 and into 2024, with a 1-year stock performance of roughly +100%. Last year the company greatly benefited from the divestiture of its fulfillment business, which has improved its bottom line. With our expectation that sales will still grow double-digits in FY24, we turn our attention to how SHOP can balance sales growth with continued operating margin expansion. We believe margin expansion is key for its stock’s continued performance. For 2H23 we model for ~17.5% NG operating margins, where FY24 is projected to be ~18%. We believe SHOP needs to show outperformance to this metric in order for shares to move more meaningfully beyond the mid-$80s (our PT is $85). $85 represents ~13.1x EV/’24E sales, toward the upper end of where SHOP has traded historically.”