E-commerce platform Shopify (SHOP) joined the $1,000 per share club last week, symbolically reaching the landmark on Canada Day. The Ottawa-based company has delivered a strong performance in 2020, with shares up by a remarkable 159% year-to-date. Given this impressive rally, should investors reduce exposure to the e-commerce highflyer?
No, is the succinct answer from Baird analyst Colin Sebastian.
While the lofty valuation is “still the biggest investor pushback,” the 5-star analyst believes there still remains a large untapped TAM (total addressable market) that Shopify has yet to penetrate.
Sebastian said, “Shopify has made our list of favorite stocks each year since initiating coverage in early 2016. In our view, there are scarce few (if any) public software companies as closely tied to the enormous e-commerce share shift, with an established leadership position, and world-class product and engineering. Moreover, we see multiple incremental revenue drivers ahead from new paid services, new partnerships (e.g., WMT) and consumer facing technology (Shop app).”
It’s no secret that as the coronavirus raged across the globe, the e-commerce sector benefitted.
COVID-19 has sped up what was already an underlying shopping trend – the move to online. Sebastian estimates this will result in an “incremental shift of roughly $200 billion in annual retail spend in the U.S. from offline to online channels.”
Shopify, PayPal and Amazon make up roughly 80% of e-commerce volume in the U.S. This means that Shopify stands to “capture a significant amount of that incremental spend.”
Despite the massive gains in 2020, Shopify is still valued lower than both, implying it has more room to grow.
And it is growing, still. Recent checks made by the investment firm indicate that merchant growth on Shopify is increasing. Shopify now has 1.3 million merchants and brands using its service, which is 200,000 more than when last surveyed in late January.
Additionally, the company’s “variable revenue base” should further expand due to the rising adoption of Shopify Payments.
Accordingly, Sebastian keeps an Outperform rating on SHOP shares, while bumping up the price target from $820 to $1,100. Should the figure be met over the next 12 months, there’s upside of 7% in store. (To watch Sebastian’s track record, click here)
Looking at the consensus breakdown, 8 Buys, 12 Holds and 1 Sell were assigned in the last three months. As a result, SHOP has a Moderate Buy consensus rating. However, the $824.94 average price target implies shares could drop by nearly 16% in the year ahead. (See Shopify stock-price forecast on TipRanks)
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