Shopify is set for a rebound, Citi says

With its stock in an extended funk, one could be excused for believing Shopify (Shopify Stock Quote, Chart, News, Analysts, Financials NYSE:SHOP) is yesterday’s story.

Not so, says Citi analyst Tyler Radke, who in a research report to clients June 26 maintained his “Buy” rating on SHOP and raised his price target on the stock from $95.00 to $96.00.

As reported by the Globe and Mail, Radke, in a report entitled “On the Right Side of AI, Growth and Margins Heading into 2025”, broke down where SHOP is st right now.

“Shares of SHOP are down 20 per cent year-to-date (vs. up 7 per cent for IGV [iShares Expanded Tech-Software Sector ETF]) as Shopify’s investment cycle pressures margin expansion in 2024,” the analyst wrote. “Shopify’s 10.8-per-cent OPM in 1Q24 (vs. 18.5 per cent in 4Q23) disappointed investors as the company ramped performance marketing spend to drive incremental growth in 2025+. We view increased marketing spend as a net positive given the favorable ROI on these investments with gross profit payback periods currently well under Shopify’s 18-month guardrails. Though a headwind to operating margins in the short term, we remind investors that this spend is incremental to ‘25 revenue growth and can be turned off at any time. We expect these investments to drive meaningful returns as Shopify diversifies from paid search to other channels such as podcasts, tv commercials, etc. While year-over-year improvements in operating income growth stall out in 3Q24, we believe operating income growth can inflect in ‘25. We model operating income growth of 63 per cent year-over-year in 2025, approximately 20 basis points faster than consensus. Our analysis … attempts to separate performance marketing spend from total operating expenses and suggests that performance marketing spend could be easing (meaning our operating expense estimates could be conservative). In addition, core operating expenses continue to show leverage with headcount growth remaining limited.”

Radke says rather than looking to lead the charge, SHOP is now an incdirect beneficiary of AI trends.

““Unlike some of its SaaS peers (CRM, HUBS, WDAY, etc.) that are seeing outsized macro + AI induced indecision headwinds, we see Shopify as more immune from this AI ‘crowding out’ effect,” he said. “Shopify is mission critical in assisting SMBs/enterprises complete creative and operational tasks from store building, marketing, and customer targeting to customer support, shipping, etc., which reduces the need for merchants to adopt 3P solutions. We consider Shopify a ‘downstream’ beneficiary of AI as it’s not directly monetizing from AI, rather, it’s empowering its merchants which translates into its own growth. Shopify’s AI tools (Shopify Magic and Sidekick) help merchants enhance the buying experience for its customers while accelerating sales, which ultimately drives Shopify’s total GMV. We believe Shopify’s AI tools serve as a conversion tool for Pro merchants and a catalyst for Merchant Solutions. We’re modeling $10.6-billion in Merchant Solutions revenue by FY26 (10 per cent higher than consensus) driven by solid traction with newer offerings (Shop App and Shop Pay, Audiences and Campaigns, Markets, Tax, Commerce Components, etc.) and our conversations with management, merchants, and partners indicating Shopify’s strong adoption and early success broadening its TAM into on-premise retail stores and B2B eCommerce. Shopify’s offline customer sales grew 32 per cent year-over-year in 1Q24 (vs. total GMV up 23 per cent), growing 1.5 times online revenue and 1Q24 B2B GMV grew by 130 per cent year-over-year, after having doubled in ‘23.””