Analysts are cutting expectations for Shopify Inc.’s first-quarter financial results as growing concerns over e-commerce weigh on shares of the Ottawa-based company amid a rout in global tech stocks.
E-commerce stocks have maintained high values for most of the past two years, supported by bets on public reluctance shopping in physical stores during the pandemic. But, as consumers gradually revert to old habits and soaring inflation raises questions about spending, analysts warn that the growth in online traffic seen during the pandemic may not prove sustainable for consumers. companies such as Shopify, Amazon.com Inc. and Etsy Inc.
Last week, Shopify became this year’s Canadian worst performer on the S&P/TSX Composite Index. The company has lost more than $155 billion in market value so far this year, down about 69%. Also last week, Amazon reported a first-quarter loss of $3.8 billion, compared to a profit of $8.1 billion in the same quarter last year, sending its stock price plummeting. The price per share of Etsy, which will report quarterly results on May 4, has fallen 57% in 2022.
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Ahead of Shopify’s earnings report, to be released on Thursday, analysts are cutting their price targets for its shares, and the company’s average consensus earnings estimate has fallen in recent weeks. CIBC Capital Markets, for example, cut its target for Shopify nearly in half, from US$850 to US$460, while keeping the stock’s rating at neutral. Analysts at Piper Sandler, Canaccord Genuity and RBC Capital Markets also lowered their targets.
Tom Forte, managing director and principal research analyst at DA Davidson, has placed his price target for Shopify under scrutiny. The company’s higher operating expenses could flatten its earnings before interest, tax, depreciation and amortization (EBITDA) growth, he said.
“Right now, if you look at the state of e-commerce, there are multiple challenges,” he added. “There’s inflation, ongoing supply chain challenges, and then you have a backdrop where investor sentiment for tech stocks has deteriorated significantly. This all works against Shopify.
According to CIBC’s equity research, traffic to Shopify’s website was down about 6% this quarter, compared to the year-ago quarter. “Although Shopify has often exceeded expectations since its IPO in 2015, the margin has been shrinking,” CIBC analyst Todd Coupland wrote in a note to clients.
RBC analysts Paul Treiber and Daniel R. Perlin wrote in a note last week that they hoped to hear more about the recently announced changes to Shopify’s stock structure during Thursday’s earnings call. The company announced in early April a plan to split its shares so it could attract more retail investors. But since then, its stock price has fallen sharply, hitting several new lows.
“Consumer spending concerns continue to linger,” Mr. Treiber and Mr. Perlin wrote.
Still, Mr. Treiber and Mr. Perlin told customers they remained hopeful. “While stocks will likely remain volatile in the near term, we believe Shopify is one of the most compelling long-term growth stories in our coverage,” they wrote. They moved their price target for Shopify from $1,300 to $1,000.
Coupland noted that Shopify’s growth still outpaces others in the industry, but like all e-commerce businesses, it’s being hit as brick-and-mortar stores regain their appeal.
“Shopify’s growth will outpace the market,” he wrote, “but it’s slowing.”
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