SHOP - Shopify: Still Buy Strategically Positioned For Higher GMV Growth

2024-01-12 09:00:00 ET

Summary

• We remain buy-rated on Shopify.
• We expect to see positive revisions in e-commerce growth driven by stronger-than-expected consumer spending due to holiday demand and new strategic partnerships.
• Additionally, we expect above consensus GMV growth as the company gains more share with enterprise and offline merchants.
• The stock is up 92% since our upgrade to buy in March 2023, and over the past 3M, the stock outperforms the S&P 500 by 41%.
• We now think Shopify is better positioned to outperform into 2024.

We continue to be buy-rated on Shopify ( SHOP ); the stock outperforms the S&P 500 by 69% since our initial note in March of last year. Our bullish sentiment in March was largely based on our expectation of revenue growth driven by potential price increases, product expansion, and management's increased focus on profitability. We're now seeing this sentiment extend to the fourth quarter of FY23. Management is now visibly working to consolidate its position in the commerce space; the company sold off its logistics business to improve profitability, launched the Retail Plan, a new pricing plan for brick-and-mortar businesses, and released enterprise-grade payments hardware, POS Terminal. Coupled with the expansion of the company's products, SHOP is also webbing out its partnerships; the company announced an app integration allowing U.S. merchants using Amazon's ( AMZN ) fulfillment network the option to add the Buy with Prime app from SHOP's app ecosystem into Shopify checkout. All this strengthens SHOP's position in the commerce market against the competition, including AMZN, Etsy ( ETSY ), Walmart ( WMT ), Target ( TGT ), and Costco ( COST ).

The following outlines our rating history on SHOP.

Equally as important weighing into our bullish sentiment on the stock ahead of 4Q23 earnings is our belief that top-line growth will be driven by better-than-expect seasonal demand from the holidays; online shopping for the holiday season in 2023 broke a record at $222B, more than half of which was achieved in November. We expect seasonal demand tailwinds to be reflected on SHOP 4Q23 earning results, positioning the company for a more comfortable beat.

Our optimism around SHOP is primarily driven by our expectation of above consensus Gross Merchandise Volume or GMV in 2024. GMV grew 22% to $56.2B in 3Q23 versus 17% Y/Y growth in the quarter prior. We think higher enterprise share gain will help support double-digit Y/Y GMV growth this year. Still, SHOP is not without risks. The company may face gross profit margin headwinds due to lower payment take rates cooped with non-payment Merchant Solution attach rates; this was the basis for JMP securities to downgrade the stock in mid-December. We see a continued growth rate of gross profit margins this year in spite of GMV growth being weighed more toward enterprise; gross profit margin increased 36% to $901M last quarter, up from 27% Y/Y growth a quarter prior in 2Q23 to $853M. We see an increasingly favorable risk-reward profile for the stock in 1H24.

Valuation

SHOP is not cheap; in fact, the stock is trading above the high growth peer group average at 11.8x EV/C2024 Sales versus the peer group average at 9.4x. We focus on the EV/Sales ratio to value the stock as we believe SHOP is a growth stock. The premium multiple is justified, in our opinion, due to SHOP's dominant position in the e-commerce business and expanding share in enterprise. Still, we think management will need to execute perfectly going forward for the higher valuation to be digestible for investors. We believe the current valuation is pricing in future earnings that we expect SHOP to meet as the macro environment recovers. We see the stock outperforming in 1H24 and recommend investors explore entry points at current levels.

The following outlines SHOP's valuation against the peer group.

Word on Wall Street

Wall Street is more neutral on the stock. Of the 47 analysts covering the stock, 21 are buy-rated, 24 are hold-rated, and the remaining are sell-rated. We think Wall Street's more cautious sentiment is due to concerns over consumer spending slowdown while macro headwinds spill into this year. We're not too concerned about next quarter's performance as it'll reflect the past three months, which include the holiday seasonal demand. We think the FY24 guidance anticipated on next quarter's earnings call should shed more light on demand habits.

The stock is currently priced at $80 per share. The median sell-side price-target is $74, while the mean is $73, with a potential downside of 8-9%. The following outlines Wall Street's sentiment on the stock.

What to do with the stock

We remain buy-rated on SHOP. We expect SHOP to continue delivering an upward trend driven by tailwinds from seasonal holiday demand for 4Q23 and strategic partnerships and expanding enterprise market share for FY24 guidance. We expect the company's gains with enterprise and offline merchants to support above-consensus GMV growth. We see an increasingly favorable risk-reward profile for SHOP in FY24 as FY23 revenue will factor in the 400 to 500 basis points impact from the sale of the logistic business. We believe SHOP is better positioned to outperform in 2024.

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