Shopify headquarters in Ottawa, Canada.
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With Shopify stock down nearly 80% so far this year, some investors might be tempted to bottom fish one of the leading providers of software used for e-commerce. But a quick turnaround in financial performance is unlikely, and one new analyst on the stock is urging investors to stay on the sidelines.
Shopify (ticker: SHOP) stock soared during the pandemic, as many businesses rushed to set-up online stores with most physical retail outlets shuttered. But the stock has reversed course this year, as the pace of e-commerce growth slowed, and earnings disappointed.
JMP Securities analyst Andew Boone picked up coverage of Shopify shares on Tuesday with a Market Perform rating, declining to set a price target on the stock. Boone says Shopify offers “a best-in-class commerce service,” and he thinks the company over time will increase its share of both the e-commerce software market and of overall commerce. But he also cautions that the company is “entering a major investment cycle,” as it adds fulfillment services to its product lineup. He thinks the additional investment will limit the company’s ability to expand margins and generate free cash flow.
Boone writes in a research note that building out the Shopify Fulfillment network will be capital-intensive. He notes that the company has projected $1 billion of capital spending over five years, but adds that there is risk that the company’s estimate is too low. He thinks the fulfillment network will be “highly valued by merchants,” but will weigh on free cash flow in an investing environment “increasingly focused on profitability.”
The analyst notes that Shopify stock at Friday’s closing level traded at 4.5 times his 2023 revenue forecast—and 142 times his estimate for 2023 Ebitda, or earnings before interest, taxes, depreciation, and amortization. “We believe the risk/reward is balanced at current levels,” he writes.
Despite the cautious calls, Shopify stock on Tuesday have rallied 2%, to $32.06.
Write to Eric J. Savitz at eric.savitz@barrons.com
Source: finance.yahoo.com