Veritas Investment Research analyst Liam Gallagher, who was the only analyst to give Shopify Inc. a sell rating before its dramatic decline, believes it is still premature to buy the stock despite the recent selloff.
Gallagher downgraded the Canadian e-commerce company to sell in August when shares were trading at about 95 times forward earnings. Although the stock initially rose more than 20% to a record high in October, it subsequently plunged over 30% from that peak, validating his bearish stance.
Valuation Concerns Persist
Even after the selloff, Shopify continues to trade at a significant premium compared to the broader market. Canada-listed shares closed at $164.84, or approximately 60 times forward earnings. In contrast, the technology-heavy Nasdaq 100 index trades at around 24 times earnings, while the S&P/TSX Composite Information Technology Index is at 31 times.
Gallagher remains cautious, stating, “It’s a really high quality business, but the cost of admission is too high. I am not willing to pay that ticket to get into the concert.” He maintains a price target of $163.51 on the stock.
Mixed Views Among Investors
While Gallagher holds a sell rating, other investors see the pullback as an opportunity. Sam Baldwin, senior portfolio manager at Guardian Capital LP, said his team recently bought into Shopify as a new position. “We’re all of a sudden a lot more interested because you’ve got a much better business model and performance coupled with a much more attractive valuation,” he noted.
Shopify’s first-quarter results, due before the market opens on Tuesday, will test the stock's valuation. Analysts expect a 31% increase in both profit and revenue, according to Bloomberg data. However, Gallagher remains unmoved, predicting that revenue growth may cool to a mid-teens rate in the coming years. “I fully expect them to have a good quarter next week. I’m not sure if there could be new information that would make me change my rating,” he said.
Gallagher emphasized that the most critical factor for investment returns is the price paid. “With any investment the most important factor to determining your return is the price you pay,” he said, adding that the stock remains too expensive to generate strong long-term returns.
