This Shopify selloff is overdone, National Bank says

It’s a tough day in the market but Shopify (Shopify Stock Quote, Chart, News, Analysts, Financials NYSE:SHOP) shareholders are having it even tougher.

Following the company’s fourth quarter results, Shopify was pummeled, down 12 per cent at midday as markets were routed on fresh inflation data.

But National Bank Financial analyst Richard Tse says this will be the pause that refreshes for a stock that has much more to give.

In the fourth quarter, SHOP produced Gross Profit Dollars of $1.1-billion on revenue of $2.1-billion, a topline that was up 24 per cent over the same period a year prior.

“2023 was an incredible year for both Shopify and our merchants. Our strong Q4 and annual results are a powerful testament to the progress we have made building fast, reliable, and unified software for merchants of all sizes,” said Harley Finkelstein, President of Shopify. “As we look ahead to 2024, our focus remains on driving innovation in an ever-evolving commerce landscape, delivering products that will propel our merchants’ businesses forward, with the support of our world-class talent and our valued merchants and partners.”

Tse says the reason SHOP is falling is not really that material.

“Shopify reported strong FQ4 results – that said, the pullback in the stock at the time of writing is due to an incremental pickup in OpEx related to marketing for new customer acquisitions. And while the Company did not provide a full year view of that impact, the scale of SHOP’s price appreciation this past year (and YTD) is what’s causing what we believe is a short-term pause off high expectations.”

“With respect to FQ4, revenue growth was up 24% Y/Y (+30% ex. Logistics) with Adj. Operating Income margin expanding 260 bps sequentially to 18% which came from Shopify’s capital discipline in F23. And for a name that had been absent of traditional fundamental metrics – the focus on capital discipline helped drive ROIC (10% in FQ4’23; +400 bps Y/Y) and FCF margin (21% in FQ4’23). With respect to the notable KPIs, GMV was up 23% Y/Y to $75.1 bln, Shopify Plus MRR as a % of total MRR was 31% (flat Q/Q), take rate (MS Revenue / GMV) was essentially flat Q/Q c/o a revenue mix shift towards Payments, with continued strength internationally,” the analyst said. “All great, but that’s history – for a stock that’s had material appreciation over the past year, expectations were high going into the quarter and F24 which meant there could be no disruption in trajectory – which is what we got with the Company’s outlook. While Shopify only provided FQ1 guidance, it was enough to cause hesitation for operating leverage. Specifically, Shopify noted it had uncovered some new customer acquisition opportunities and as such, plans to increase marketing spend to capture those markets. What’s interesting though is that the Company qualitatively suggested it expects improving FCF margin through the year – our read is that F24 will still be above F23 when it comes to FCF. Yet, we understand the pause given the run in the name; interestingly, from a valuation perspective, SHOP is actually more compelling today care of its (positive) profitability inflection.”

In a research update to clients February 13, Tse maintained his “Outperform” rating and one-year price target of (US) $100.00 on SHOP, implying a return of 27.9 per cent at the time of publication.

The analyst thinks SHOP will generate Adjusted EBITDA of $1.23-billion in revenue of $8.47-billion in fiscal 2024. He expects those numbers will improve to Adjusted EBITDA of $1.89-billion on a topline of $10.2-billion in fiscal 2025.