On Wednesday, Scotiabank (TSX:BNS) analyst Kevin Krishnaratne updated the price target on Shopify (NYSE:NYSE:SHOP), increasing it to $115 from the previous $80, while keeping a Sector Perform rating on the stock. This adjustment comes after Shopify reported a strong performance in the third quarter, particularly noting an acceleration in Gross Merchandise Volume (GMV) growth compared to the second quarter, and a free cash flow (FCF) that exceeded expectations by 16%.
Shopify is now gearing up for the holiday season, with expectations for GMV and merchant solutions growth to at least stay in line with the third quarter trends. Additionally, FCF margins are anticipated to improve further, potentially increasing from 19.5% to around 20.7%. Krishnaratne highlighted Shopify's leading position in the market, which has allowed it to capture a larger share of the retail sector globally across various merchant types, including online, offline, small to medium businesses, and enterprise-level clients.
The stock's value saw a significant rise, closing up approximately 25% on Wednesday. The current stock price reflects around 24.8 times the calendar year 2025 estimated enterprise value to gross profit (EV/GP). Despite the Sector Perform rating being based solely on valuation, Scotiabank views Shopify as a core holding and recognizes the potential for further upside. This optimism is partly due to expectations of positive news flow around Black Friday Cyber Monday (BFCM), supported by industry sources suggesting a resilient consumer base.
The revised price target of $115 is now based on a calendar year 2025 EV/GP multiple of approximately 26.0 times, up from the previous multiple of 17.0 times. This increase acknowledges the analyst's heightened confidence in Shopify's ability to maintain a well-balanced operating profile in the near term, with a high-teens to 20% FCF margin and multiple avenues to sustain around 20% growth in gross profit.
In other recent news, Shopify has been making notable strides in its financial performance. The company's third-quarter earnings report showed a 26% increase in revenue, surpassing analysts' predictions of a 23% rise. This surge was largely due to a robust 24% growth in Gross Merchandise Volume (GMV), outperforming the 21% forecast by analysts.
In addition to these financial gains, Shopify has also expanded its merchant base, with significant contributions from its Enterprise solutions, Point of Sale (POS) systems, and the Europe, Middle East, and Africa (EMEA) region, where GMV saw an impressive 35% growth. The company's Free Cash Flow (FCF) margin also stood out at 19.5%, notably surpassing the consensus estimate of 16%.
Following these developments, Oppenheimer maintained a positive outlook on Shopify, raising the price target on the company's shares. The firm's revised target reflects confidence in Shopify's continued revenue growth and profitability. Looking ahead, Shopify's fourth-quarter projections indicate an acceleration of top-line growth to the mid- to high-20% range, partly due to a new partnership with PayPal (NASDAQ:PYPL).
InvestingPro Insights
Shopify's recent performance and Scotiabank's optimistic outlook are further supported by real-time data from InvestingPro. The company's market capitalization stands at an impressive $140.7 billion, reflecting its significant presence in the e-commerce sector. Shopify's revenue growth remains strong at 23.18% over the last twelve months, aligning with the analyst's expectations of sustained growth.
InvestingPro Tips highlight Shopify's financial strength and market position. The company is expected to be profitable this year, with a net income growth forecast. This aligns with Scotiabank's positive view on Shopify's ability to maintain a balanced operating profile. Additionally, Shopify's liquid assets exceed short-term obligations, indicating a solid financial foundation as it prepares for the holiday season.
The stock's recent performance has been remarkable, with InvestingPro data showing a 32.96% return over the last week and a 74.72% return over the past year. This surge is consistent with the 25% increase mentioned in the article following the Q3 results. However, investors should note that the stock is trading near its 52-week high and has an RSI suggesting it may be in overbought territory.
For readers interested in a deeper analysis, InvestingPro offers 22 additional tips on Shopify, providing a comprehensive view of the company's financial health and market position.
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