Shopify is tightening up on hiring. One analyst likes the stock more as a result

By Bill Peters

'We believe investor expectations have over corrected," Morgan Stanley analysts say

Shares of Shopify Inc. took a hit in February after the e-commerce platform warned of higher operating costs. But Morgan Stanley analysts on Friday said investors may have overreacted, arguing that there's still a lot to like about the stock, even as inflation forces consumers to temper their spending habits.

For one, the analysts said, Shopify (SHOP) has tightened up on hiring, leaving more room for free-cash-flow gains. The company's efforts to target "up market" merchants and consumers and expand internationally had gained traction, they said. And they saw opportunities to bring in more money from advertising next year.

All of that was enough for Morgan Stanley to upgrade the stock to "overweight" - its most positive score and its version of a buy rating - from "equal-weight." The analysts also raised their price target to $85 from $74.

Shares of the company, which provides a platform for businesses to sell things online, crept 0.2% higher on Friday. The stock is still up 45% over the past 12 months.

"Share gains upmarket by Shopify support confidence in the durability of growth against tempered consumer spending expectations," the Morgan Stanley analysts said in a research note. "A disciplined view on headcount provides room for further operating leverage against more measured expectations, supporting our upgrade to overweight."

The analysts said that the moves Shopify is making now could help it grow sales by at least 20% over the next several years.

The analysts added: "Despite questions around the durability of Shopify's operating margin expansion following Q4 results, we believe investor expectations have over corrected and commentary pointing to modest headcount expansion in FY24 still leaves room for further realization of operating leverage and [free cash flow] growth in the business."

In February, the company said it expected its first-quarter operating expenses to grow in the low-teens percentage range when compared to the $773 million in the fourth quarter. Executives said that while it expected its overall headcount to be flat in the months ahead, higher spending on marketing, higher payroll taxes and staff pay increases added to its expenses.

The Morgan Stanley analysts said Shopify's efforts to help merchants more precisely target customers would help its ads business. Meanwhile, an increasing number of larger businesses, like Banana Republic's home-furnishings segment and On Running, have begun working with Shopify to sell products.

"These are brands that historically did not always think about Shopify," Shopify President Harley Finkelstein said on the company's earnings call in February.

-Bill Peters

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04-19-24 1352ET

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