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Analysts are pessimistic on Shopify stock price: what now?

By: Invezz

Shopify (NYSE: SHOP) stock price is up for the third straight month as the company switches its strategy from growth to profitability. After dropping sharply in 2022, the stock has staged a strong recovery, rising by over 230% to the current $80.10. This rebound has boosted its valuation, which stands at almost $100 billion.

Some analysts are pessimistic

Some Wall Street analysts have turned bearish on the Shopify stock price, citing its expensive valuation. In December, an analyst from JMP Securities downgraded his view from market outperform to market perform. In the note, the analyst warned that, while the company has momentum, it might fail to reach its operating income target.

In a separate report, Scott Devitt, a Wedbush analyst, trimmed his outlook from outperform to neutral. He believes that the company is fully valued and that it has limited avenues to grow its multiples. In his note, he sees the company’s revenue growth coming in at 22% and 20%, respectively.

Piper Sandler’s Clarke Jeffries also downgraded the Shopify stock price target to $56 from $58. He noted that the company faces significant macro headwinds in the near term. He also argued that the company’s valuation is quite stretched.

For starters, Shopify is one of the biggest players in the e-commerce industry. Unlike Amazon and eBay, the company does not run a store where people can buy and sell. Instead, it provides software to help people create their e-commerce stores.

Shopify makes money through several avenues. It charges its members a monthly fee, which starts at $32 per month, with the most expensive plan being $399 per month. Shopify+, a service for high-volume companies starts at $2,000 per month. 

On top of this, the company makes money through transaction processing, where it takes a small amount of money for all sales. In the most recent quarter, Shopify said that its merchant solutions revenue rose by 24% while its subscription revenue rose by 29% to $486 million.

There are genuine concerns about whether Shopify will continue growing as it has done in the past decade. Besides, most of the biggest retailers, who are its key target market, have an e-commerce provider already, and future growth will be limited.

Shopify’s management is aware of this fact and is now pivoting towards profits. In the most recent earnings report, the CFO said:

“This continued improvement in our free cash should be viewed as a clear indicator of the steps that we have taken this year to drive towards greater profitability as we build for the long-term.”

Analysts are right to call out Shopify for its valuation. According to SeekingAlpha, the company has a forward PE ratio of 114, much higher than the sector average. In real terms, this is a $100 billion company that has generated $6.5 billion in revenues in the TTM and a net loss of over $1 billion. Its revenue is expected to hit $8.3 billion in 2024 and $10 billion by 2026. 

While Shopify is very overvalued, there is a likelihood that its stock will continue doing well if its revenue growth coincides with profitability. Most importantly, the shares seems like they have great momentum as bulls attempt to reclaim its all-time high.

Shopify stock price forecast

SHOP chart by TradingView

The weekly chart shows that the SHOP share price has been in a strong uptrend in the past few months. This rally coincided with the ongoing technology stocks rally. Most recently, the shares have flipped the crucial resistance point at $71.40, the highest swing on July 10th. The stock has also risen above the 50-week and 25-week moving averages.

Most notably, it has formed a broadening wedge pattern, which is often a bullish sign. Therefore, the shares will likely continue rising as buyers target the key resistance at $100. This view will be invalidated if the stock drops below the support at $71.40.

The post Analysts are pessimistic on Shopify stock price: what now? appeared first on Invezz

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