Analysts slash estimates for Shopify amid global retreat for tech stocks

Shopify Inc. headquarters signage in Ottawa on May 3.Sean Kilpatrick/The Canadian Press

Analysts have slashed expectations for Shopify Inc.’s SHOP-T second-quarter financial results as macroeconomic concerns weigh heavily on the outlook for the Ottawa-based company amid a global rout for technology stocks.

Shares of Shopify, which provides software for businesses and creators around the world to sell their products or services online, had soared for much of the past two years, trading at a record high of $222.87 a share (adjusted for a recent 10-for- 1 stock split) on the Toronto Stock Exchange. Shopify even eclipsed Royal Bank of Canada in the early days of the pandemic to become the country’s most valuable company. Then, the bottom fell out.

Shopify’s results and growth have suffered this year, along with its share price, amid mounting economic uncertainty, soaring inflation and sharply higher interest rates. Many analysts believe the rapid e-commerce growth and online traffic that Shopify enjoyed during the pandemic is now proving to be unsustainable.

Ahead of Shopify’s second-quarter earnings report, which will be released Wednesday, analysts have been sharply cutting their average consensus estimates for the company’s earnings, currently expecting just a penny or two a share.

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CIBC Capital Markets and DA Davidson have lowered their price targets to US$42.50 and US$31, respectively, while keeping the stock’s rating at neutral. At the same time, RBC Capital Markets is placing its target at US$70. Shopify shares closed at US$36.71 on Monday on the New York Stock Exchange, and $47.11 on the Toronto Stock Exchange.

In a note to clients on Monday, RBC analysts Paul Treiber and Daniel Perlin called their consensus earnings target “slightly optimism.” They are revenue of US$1.34-billion and adjusted a share of three earnings cents, though they are cautious second-quarter revenue may also fall short of their expectations.

Mr. Treiber and Mr. Perlin believe the deceleration in consumer spending is weighing on Shopify’s gross merchandise volume. They said RBC’s equity research indicates growth for Shopify merchants has “plateaued” in the second quarter.

Still, the RBC analysts say, Shopify would remain marginally profitable. “While macro uncertainty may continue to create volatility in the shares, we believe that Shopify is one of the most compelling growth stories in our coverage universe.”

Tom Forte, managing director and senior research analyst at investment bank DA Davidson, said the list of macroeconomic concerns that affect Shopify is growing. That has made it “incredibly difficult” to benefit from the small- to medium-sized enterprise and e-commerce market, he said.

Mr. Forte has lowered his quarterly sales forecast for the company by 10 per cent to US$1.18-billion from US$1.31-billion. Meanwhile, CIBC is expecting second-quarter revenue of US$1.31-billion, which would be up 17 per cent year-over-year.

While Shopify has often exceeded expectations since its 2015 initial public offering, the margin has been shrinking, CIBC analyst Todd Coupland told clients on Monday.

But, Mr. Coupland said, Shopify continues to outperform its peers in the e-commerce space and among other tech companies in terms of year-over-year web traffic growth. He believes it’s a confirmation that Shopify’s direct-to-consumer model is here to stay, especially as it continues to expand in other areas.

“Shopify is the market leader for e-commerce enablement,” he said. “It should maintain this position in priority international markets.”

In the first quarter of 2022, Shopify posted its slowest growth in seven years, missing analysts’ project on a number of points including earnings, revenue and gross merchandise volume. The company’s adjusted net income for 2022′s first quarter came in at US$25.1-million, a fraction of the US$254.1-million it earned in the same period last year.

On a per-share basis, Shopify reported earnings adjusted of 20 US cents, far short of analyst projections for 64 US cents. Revenue for the company was US$1.2-billion, up 22 per cent, but that also lagged first-quarter expectations of US$1.25-billion.

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