Shopify Neutral At Citi, Sees Multiples Stretched

Shopify Inc’s (NYSE: SHOP) shares are currently trading at a premium valuation to peers and already reflect the company’s “hyper-growth profile,” Citi’s Kenneth Wong said in a report. He initiated coverage of the company with a Neutral rating and a price target of $35.

Analyst Kenneth Wong mentioned that Shopify is a leading cloud eCommerce platform and is poised to benefit from the digitization of small business merchants. He noted that the company had tripled its revenue run rate over the past couple of years and is expected to generate more than 40 percent growth through FY18.

Large And Attractive TAM

Shopify addresses a large TAM, with an estimated ~10M small business merchants within the company’s core geographic markets of US, UK and Canada. Wong pointed out, however, that Shopify has merely 275K subscribers, which translates to a ~3 percent penetration, “leaving significant runway.”

The analyst further added that SMBs were “notorious technology laggards” and exhibited a high turnover rate. “These market dynamics result in a constant pursuit of new customers to backfill churn.”

Limited Upside

Shopify’s shares are trading at a premium to peers, and there are concerns over the multiple compressing towards those companies that are also expected to generate mid-20s growth in FY18. “SHOP will need to consistently deliver numbers and targets ahead of expectations to deliver shareholder value,” Wong wrote, while recommending waiting for “more favorable entry points to establish positions.”

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