Shopify Stock Has Doubled. Time for a Downgrade

Shopify stock has zigzagged violently over the last three years.

Evercore ISI analyst Mark Mahaney downgraded shares of e-commerce software provider Shopify as a valuation call after a big 2023 rally.

The e-commerce-software firm’s shares rocketed higher during the pandemic, their valuation increasing five times to peak from trough as sellers of every conceivable good and service added an online store. Then last year, as the economy fully reopened, Shopify stock (ticker: SHOP) gave back all its gains and then some, falling 73%, making it one the year’s worst performers.

Shopify stock this year reversed course again, rallying nearly 100%, as the company opted to shutter a costly push into logistics, reducing staff by 20% while adding new artificial-intelligence functionality to its software. 

Evercore analyst Mark Mahaney late Monday reduced his rating on Shopify stock to In Line from Outperform, while keeping his $69 target price, about flat with the stock’s closing level Monday at $68.68. His view is that this year’s robust rally has reduced the stock’s appeal. Mahaney asserts in a research note that this year’s rally was well deserved, driven by stabilizing fundamentals, material cost-control measures, and the shift away from a fully integrated shipping and logistics business model. But Mahaney sees “few clear catalysts going forward.”

Mahaney notes that the stock now trades for about 11 times forward sales, which he says is higher than all but one other internet stock he follows. That’s a reference to the online advertising platform Trade Desk (TTD), which he notes has “dramatically higher” margins than Shopify. He notes that Shopify stock is trading for more than 100 times expected 2024 Ebitda, or earnings before interest, taxes, depreciation, and amortization.

Mahaney adds that looking at a basket of software stocks with similar scale and revenue growth, he finds the group trading between nine and 11 times estimated 2024 sales, “which doesn’t justify a further rerating for SHOP shares.” And he notes that the basket has gross margins in the 75%-to-85% range, well above Shopify at 48%.

Mahaney writes that the downgrade boils down to a valuation call. He also advises that investors looking for an online retail play at a much more reasonable valuation should consider Amazon.com (AMZN), trading for about 2 times forward sales.