ATB analyst shifts Shopify rating to "sector perform," citing growth demands built into high valuation
An analyst has downgraded his rating on Shopify Inc. shares, citing the high valuation of the company despite its strong recent financial results, as reported by BNN Bloomberg.
Martin Toner, director of institutional research at ATB Capital Markets, changed his rating from “outperform” to “sector perform” in a note to investors on Tuesday.
He nevertheless raised his one-year price target for the stock from $120 to $145, following Shopify’s third-quarter earnings report.
Shopify, which reports in US dollars, posted a net income of US$828m for the quarter, an increase from US$718m in the same period last year. Revenue reached US$2.16bn, surpassing the average Bloomberg analyst estimate of US$2.12bn.
In an interview with BNN Bloomberg on Thursday, Toner explained that his rating change was primarily driven by the company’s valuation.
“I valued the company using a 10-year DCF (discounted cashflow), and when I look at what expectations are built into the price here, Shopify is going to need to grow at 20 per cent for 10 years,” he said.
“They’re going to need to get to roughly a trillion dollars in gross merchandise volume in 10 years.”
Toner further noted that he factored in strong free cash flow margins in the mid-twenties but found it challenging to adjust his model much higher, prompting him to “take a little money off the table.”
According to Toner, discounted cashflow calculations help investors understand what is already priced into a stock. He pointed out that Shopify is trading on forward revenue at around 14.5 times, which he described as “relatively rarified air.”
Given this valuation, Toner suggested Shopify’s only comparable peers are “world-leading global tech companies.”
Despite the rating downgrade, Toner acknowledged Shopify’s strong performance. “This quarter will probably be one of the best quarters in all of tech for them.
And they’re executing quite well,” he said, highlighting Shopify’s success in growing alongside its customers and building a platform that serves larger merchants.
Toner noted that Shopify continues to attract new customers each quarter, which fuels optimism for sustained growth.
“They’ve built the platform out to service those larger merchants and now they’re winning other large merchants,” he said, adding that this steady addition of new customers is why “investors are pretty optimistic about a long duration of strong growth.”
