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Shopify Stock Faces Uncertainty as Valuation Soars

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Shopify, an e-commerce platform, has witnessed a remarkable surge in its stock price this year, soaring over 120%. This surge has propelled the company’s valuation above that of its competitors. However, according to JMP Securities analyst Andrew Boone, this lofty valuation might pose challenges for the stock in the coming year.

Boone recently downgraded Shopify’s stock rating from Outperform to Market Perform and decided to no longer provide a target price for the stock. His decision revolves around the fact that Shopify’s current valuation leaves little room for error, especially considering the various strategic shifts the company is currently undergoing.

This year alone, Shopify’s stock has witnessed an impressive 122% increase. FactSet data reveals that the shares now trade at 74.1 times the estimated forward earnings.

Boone highlighted the significance of flawless execution going forward while acknowledging that their estimates for 2024 and 2025 differ from market consensus. The need for precision arises due to the company’s strategic changes and high valuation.

Joining Boone in expressing concerns about Shopify’s valuation, Piper Sandler downgraded the stock in late November terming its valuation as “untenable.”

Shopify’s Profit Margin Concerns

One of the main concerns for Shopify, as highlighted by Boone, is the potential shrinkage of the company’s profit margins. This apprehension arises from the focus on new avenues of growth, particularly in attracting larger retailers through its Plus business offerings. Currently, the Plus plans offer lower payment fees compared to the Basic plans. Boone believes that this will result in lower gross profit margins on payments.

The company itself acknowledged this potential predicament during an investor day presentation earlier this month, projecting that gross margins are likely to remain stable or possibly experience a slight decline in the future.

The Consensus and Predictions

The prevailing consensus on Wall Street suggests that Shopify will attempt to increase prices for its Plus customers as a solution to support its profit margins. However, since Shopify is striving to expand its reach among larger corporations, Boone believes that a price increase is further down the line than what financial analysts’ models currently reflect.

Long-Term Prospects

Despite the challenges mentioned, Boone maintains a bullish outlook on Shopify’s long-term prospects based on the investor day presentation. He acknowledges that although e-commerce growth is projected to moderate from its pandemic-induced boom, Shopify’s rapid expansion into offline point-of-sale services will play a significant role in driving growth. This expansion will facilitate better integration of online and offline data for merchants.

“To be clear, we believe Shopify has tremendous momentum, with the company gaining share with enterprise and offline merchants, while maintaining its dominant position with new merchants,” Boone stated confidently.

Shopify Shares Slightly Dip

Analysts Remain Divided on the Stock

Shopify shares experienced a slight decline of 0.4%, reaching $76.57 on Monday.

  • Over half of the analysts, precisely 56%, label the stock as a Hold.
  • Meanwhile, 40% of analysts maintain their belief in its potential and rate it as Buy.
  • Only a small portion, constituting 4%, deem it as Sell.
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