Analyst Warns Shopify's Price Still Too High

An analyst who previously issued a sell rating on Shopify Inc. due to valuation concerns is maintaining his stance, even after a significant price decline. Liam Gallagher of Veritas Investment Research downgraded the stock in August, citing a valuation at 95 times forward earnings. Despite the stock's subsequent surge and then a fall of over 30% from its peak, Gallagher remains the sole analyst with a sell recommendation among those tracked by Bloomberg.

Gallagher describes Shopify as a high-quality business but believes the entry price is too elevated. The company's shares faced further pressure following a weak November earnings outlook and broader concerns about software stocks susceptible to AI disruption. Even after the selloff, Shopify's Canadian-listed shares trade at approximately 60 times forward earnings, significantly higher than the Nasdaq 100's 24 times or the S&P/TSX Information Technology Index's 31 times.

However, some investors see the valuation compression as an opportunity. Sam Baldwin of Guardian Capital LP noted increased interest in Shopify due to improved valuation alongside its business performance, with his team recently initiating a position. Shopify's upcoming first-quarter results, expected before market open on Tuesday, will be closely watched. Analysts, on average, forecast a 31% rise in both profit and revenue.

Gallagher anticipates a solid quarterly report but does not expect it to change his rating, as he foresees Shopify's high revenue growth rate moderating to mid-teens. He reiterated that entry price is crucial for investment returns, suggesting a wait for a more reasonable valuation. Meanwhile, other analysts have made varied calls, including upgrades for AbbVie and Snap Inc., a downgrade for Adobe Inc., and new buy ratings for Micron and Sandisk based on AI memory cycle expectations.