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Why are Analysts Skeptical of Shopify’s Rally?

Barchart - Fri Dec 1, 2023

Shares of Shopify Inc (SHOP) rallied to a 20-month high Wednesday and soared +54% in November, the company’s biggest monthly gain ever. Shopify’s share price has more than doubled this year but remains more than 50% below an all-time high posted in 2021.  However, with the stock trading at about 5% over the average analyst share price target, few analysts expect this year’s rally to continue.

Despite the recent surge in Shopify shares, many analysts remain unconvinced that the e-commerce platform has turned the corner.  According to Bloomberg data, fewer than half the analysts that follow the company recommend buying the stock, a rate well below that of other major internet companies. Earlier this week, Piper Sandler cut their rating on Shopify to the equivalent of a sell, saying, “Shares hold an untenable valuation in our view, as growth and profit assumptions embedded in chares today are too aggressive.” 

The main factor that most analysts have against Shopify is its frothy valuation.  Its shares trade at more than 11 times forward sales compared with the Nasdaq 100 Index’s ($IUXX) (QQQ) multiple of 4.1.  Amazon.com (AMZN), by comparison, trades at 2.4 times estimated sales.  Shopify rallied sharply last month after a blowout earnings report sent the stock soaring more than 20%.  Further strength came after the company said merchants had record sales over the Black Friday-Cyber Monday period.  However, Riverpark Capital, who owns the stock, said, “You can’t really make a near-term valuation argument for it.”

During the pandemic, Shopify soared as consumers remained locked down and shopped from home.  At its peak in 2021, Shopify had a valuation above $200 billion.  However, the stock plunged in 2022 and lost 75% of its value as a post-pandemic slowdown in revenue growth and surging costs from building its own distribution network hammered the stock.  Since then, Shopify has had multiple rounds of layoffs and struck a deal to allow its merchants to use Amazon’s logistics network in an attempt to boost profitability.

Some analysts remain upbeat about the prospects of Shopify as the company has taken steps to return to profitability on an adjusted basis following six quarters of losses. According to Bloomberg data, the consensus for Shopify’s 2024 earnings has nearly doubled over the past month, even as the forecast for revenue has risen less than 1% over the same period. Tidal Financial Group remains a long-term bull on Shopify and said, “If the company continues to produce 20% growth on a consistent basis, that will start to get recognized by the market.” 



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On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.