Shopify stock: Analysts cut price targets; weakness 'a buying opportunity', some say
Several analysts cut their price targets for Shopify (SHOP.TO)(SHOP) following the release of quarterly earnings that resulted in shares plunging 19 per cent, but some say the dip presents a buying opportunity for investors.
Shares of the e-commerce software company fell 19 per cent on Wednesday after the company forecast slower sales growth and a decline in gross margins for the second quarter, sparking investor concern. Shopify says it expects sales in the second quarter to grow at a high-teens percentage year-over-year, down from the last few quarters which saw average growth of about 26 per cent.
The results prompted analysts across the board to slash their 12- to 18-month price targets for U.S.-listed shares of Shopify. CIBC Capital Markets cut its 12- to 18-month price target from US$100 per share to US$85 per share; RBC Capital Markets reduced its target from US$100 to US$85 per share; Morgan Stanley dropped its target from US$85 per share to US$80 per share; and Wedbush also trimmed its 12-month price target from US$75 per share to US$68 per share.
Despite the disappointing guidance for the second quarter, some analysts see the stock decline as a potential entry opportunity for investors.
"With Shopify trading at a premium nine-times revenue multiple coming into this quarter, we sense that lofty investor expectations were not met. Overall, we continue to like Shopify’s long-term positioning and, after the dust settles, would view the weakness as a buying opportunity," William Blair analyst Arjun Bhatia wrote in a research note.
"Given the company’s positioning in the market, we believe it is a long-term winner in the space, and we continue to have a positive outlook. However, we acknowledge that it may take a clean beat-and-raise quarter before the stock works."
Morgan Stanley analyst Keith Weiss titled his Thursday research note about Shopify "don't throw the baby out with the bathwater", noting that the "lack of upside against key benchmarks leaves shares in (the) penalty box."
"However, this remains a strong core franchise, whose key initiatives (Enterprise, POS and International) are working and provide an encouraging base for future positive revisions," Weiss wrote.
"We remain positive on the secular drivers of the business and would be buyers of the shares on a better entry point into this compelling longer-term platform story."
Evercore ISI analyst Mark Mahaney wrote in a research note "despite the profitability hiccup in the Q2 guide, we come away more constructive on (Shopify) because of its impressive fundamentals and its growing proof points. Evercore ISI also cut Shopify's price target, from US$80 per share to US$75 per share.
"Markets are very sensitive to negative cost surprises these days... especially for high-multiple growth stocks," Mahaney wrote.
"But we view this as a temporary lean-in from a position of strength rather than any structural change in the profitability of the business."
Still, some caution that the environment is changing for Shopify. While the company says it expects consumer spending to remain resilient in North America, a stronger U.S. dollar and some softness in European consumer spending, particularly in the United Kingdom, weighed on its quarterly outlook. Shopify also expects gross margins in the second quarter to decrease by approximately 50 basis points, while operating expenses will be up low-to-mid single digits.
"While the 19 per cent pullback in its shares presents, in our view, a buying opportunity, investors should do so knowing the context of lower growth, (free cash flow) margins, and valuation," CIBC analyst Todd Coupland wrote in a research note.
"We expect the company to continue to outgrow the broader market, but require heavier investments in (operating expenses), and particularly in marketing, to drive future growth."
Wedbush analyst Scott Devitt reiterated a "neutral" rating for Shopify, citing near-term margin uncertainty and the company's valuation relative to other software firms.
"Shares are trading for approximately (48-times our revised 2025 estimated adjusted (earnings before interest, taxes, depreciation, and amortization estimate), a significant premium to software peers," Devitt wrote.
"While Shopify's growth trajectory is attractive, we highlight that the majority of Shopify's revenue is transaction based and the business model is structurally lower margin compared to the broader software group."
Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.
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