On Thursday, Scotiabank adjusted its price target on shares of Shopify (NYSE: NYSE:SHOP), lowering it to $75 from the previous $80, while keeping a Sector Perform rating on the stock. The adjustment follows a recent assessment of the company's financial outlook and market performance.
Shopify's stock has experienced a slight decline, currently standing around 8% above the $68 low from three weeks prior. This comes after a surge in anticipation of the company's first-quarter results. Although Shopify reported a stronger-than-expected first quarter, the forecast for lighter second-quarter revenue prompted Scotiabank to revise its growth expectations for the company. The lowered expectations stem from a slowdown in subscription trends, which are projected to decelerate to less than 15% in the second half of the year, and reduced assumptions about the company's take rate.
Despite the tempered outlook for the near term, Scotiabank acknowledges several growth drivers within Shopify's business model. These include the monetization of Shopify Plus and Point of Sale (POS) systems, as well as the adoption of newer merchant solution products. However, the firm anticipates that these factors may take a few quarters to significantly impact the company's financial performance, with fewer positive surprises expected in the second and third quarters.
The report also touches on Shopify's operational expenses, which are anticipated to keep free cash flow (FCF) margins flat from the first to the second quarter. While some investors might find the unchanged FCF margins disappointing, Scotiabank views most of the increase in operating expenses as one-time events and is less concerned about their impact.
In conclusion, while Scotiabank believes that Shopify deserves to trade at a premium compared to its peers due to its leading position in the e-commerce sector, the firm suggests that the stock may not see substantial movement in the near future due to a lack of immediate catalysts. The new price target of $75 reflects a calendar year 2025 enterprise value to gross profit multiple of 16.5 times, down from the previous 17.5 times.
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