Shopify stock looks 'relatively expensive' after strong rally, analyst says in downgrade

By Emily Bary

Atlantic Equities calls Shopify 'a best-in-class product executor' but has valuation concerns about the stock

Shopify Inc. shares have rallied 36% since the company announced it would be selling its logistics unit last week, and the name now looks "relatively expensive" in the view of one analyst.

Atlantic Equities' Kunaal Malde downgraded Shopify's stock (SHOP.T) to neutral from overweight Tuesday, citing concerns about its valuation.

"The gross profit multiple has returned to prepandemic levels despite now delivering half the growth rate, and the growth-adjusted multiple looks high compared to peers, while there is still little in the way of earnings valuation support," he wrote in his note to clients.

He added that when looking at "high-growth fintech and cloud peers, the growth-adjusted gross profit and 110x [adjusted price-to-earnings] multiples also look relatively expensive."

Malde downgraded the stock even as he acknowledged that Shopify is "a best-in-class product executor" with a "dramatically improved" runway for free-cash flow now that the company is selling off its capital-intensive logistics business.

"It is worth noting that we have significantly increased our medium-term FCF estimates due to the Logistics sale, with this lift the key driver of the stock's recent performance," Malde wrote.

See also: Shopify's stock logs best day yet as company gets set for 'significant pivot'

Additionally, he thinks consensus expectations for Shopify may be too low, while the company also has the potential to accelerate its growth in gross profit in the coming quarters.

"However, the stock has quickly reacted to these positive developments," he continued wrote.

Shares of Shopify are up 82% so far this year, as the S&P 500 index has rallied almost 8%.

-Emily Bary

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05-09-23 1502ET

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