One analyst downgraded his rating on Shopify Inc. shares based on the high valuation of the company despite the Ottawa-based e-commerce giant posted strong results earlier this week.
Martin Toner, the director of institutional research at ATB Capital Markets, lowered his rating from outperform to sector perform in a note to investors Tuesday, but still raised his one-year price target on the stock to $145 from $120 after the company reported third quarter earnings on Tuesday.
Shopify, which keeps its books in U.S. dollars, said it earned US$828 million in net income during the quarter, up from US$718 million a year earlier. Revenue for the third quarter came in at US$2.16 billion, beating the average estimate among Bloomberg analysts of US$2.12 billion.
In an interview with BNN Bloomberg Thursday, Toner said he has changed his rating on Shopify a few times over the past year and this most recent change was made on the basis of valuation.
“I valued the company using a 10-year DCF (discounted cashflow), and when I look at what expectations are built into the price here, Shopify is going need to grow at 20 per cent for 10 years. They’re going to need to get to roughly a trillion dollars in gross merchandise volume in 10 years,” he said.
“And I already build in relatively strong free cash flow margins in the mid twenties. So, when I look at that… it’s hard to flex my model up by much and hence chose to take a little money off the table.”
Toner said that discounted cashflow calculations are important for investors looking to know what is priced into a stock. He said that Shopify is trading on forward revenue of around 14.5 times, which is “relatively rarified air.”
Based on that, Toner said the only peers Shopify would have would be “world leading global tech companies.”
Despite the downgrade, he said the company is performing well.
“This quarter will probably be one of the best quarters in all of tech for them. And they’re executing quite well, they’ve grown with their customers over time. They’ve built the platform out to service those larger merchants and now they’re winning other large merchants,” Toner said.
“So, they’re adding new customers quarterly that they’ll be able to grow with over time. And so that’s why investors are pretty optimistic about a long duration of strong growth.”