Tuesday’s analyst upgrades and downgrades Shopify

Shopify Inc. (SHOP-N, SHOP-T) enjoyed “some new partnerships” during the second quarter, Citi analyst Tyler Radke warned that its financial results were likely to be hurt by “the continued normalization of e-commerce and new economic headwinds.”

“The setup for SHOP through Q2 remains challenging given stronger macro protocols in the second quarter and back half of the year,” he said in a note published on Tuesday. “Inspections and data indicate a continued weakening of consumer demand. This ranges from slower web traffic to deteriorating spending evident in our own credit card data in the apparel/electronics category, where SHOP has significant exposure. We note that job offers are down significantly from recent highs (down 80 percent), which may signal lower management confidence, but also a greater focus on balanced profitability. We still expect management to talk about 2022 as an investment year, especially with the closure of Deliverr and a much lower margin profile.”

The Ottawa firm’s new partnership with YouTube has “created some buzz” and will allow marketers to advertise, sell and tap into YouTube’s “massive” subscriber base, the analyst confirmed. But he doesn’t expect “social selling” to have a “meaningful” impact in the near future.

Ahead of Tuesday’s premarket announcement of significant job cuts, Mr. Radke cut his estimates for Shopify “meaningfully” to reflect a difficult consumer and macroeconomic backdrop. It now estimates a three-year compound annual sales growth rate of 27 percent, down from 32 percent previously.

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It now expects second-quarter revenue of $1.304 billion, down from $1.394 billion and below the Street’s forecast of $1.328 billion. Its EPS estimate fell to a loss of 1 cent, down from 8 cents and below the consensus of 2 cents.

“We are lowering our estimates below street level and expect headline numbers could come in below consensus with a more cautious outlook,” he said.

“Our remaining FY22 estimates are cut by 6-7 points (with new business additions now down 7 percent year-on-year), putting our estimates slightly below consensus. Our estimates have already baked in Deliverr, which adds 4 points of growth in the back half of the year. We now expect FY22 operating margin to be slightly below break-even after commenting on this year’s reinvestment of all gross profit back into operating operations + additional headcount from Deliverer.”

With the changes, Mr. Radke cut his price target on Shopify shares to $37 from $43.20. The street average is now $54.19.

“We maintain our neutral/high-risk rating as we still see downside risk to estimates and see SHOP as having a more discretionary/cyclical demand profile compared to peers. Given the lack of valuation support, especially with margins likely to be breakeven or worse this year, we fear the stock could remain range-bound despite some favorable new product/partnership announcements during the second quarter,” he said.

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