Shopify Analyst Who Saw Selloff Coming Says It’s Too Soon to Buy

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(Bloomberg) — The analyst who slapped the only sell rating on Shopify Inc. over valuation concerns ahead of its blistering rout said it’s still too soon to jump back in.

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Veritas Investment Research analyst Liam Gallagher downgraded the Canadian tech darling to sell in August, when a spike in the share price put it at about 95 times forward earnings, a hefty premium. While at first, it seemed like he’d missed something — shares gained more than 20% to a record in October — the call proved prescient as the stock then plunged more than 30% from the peak.

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Despite the selloff, Gallagher is sticking to his bearish view with the only sell recommendation among 54 analysts tracked by Bloomberg as covering the digital commerce platform. 

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“It’s a really high quality business, but the cost of admission is too high,” Gallagher said in an interview. “I am not willing to pay that ticket to get into the concert.”

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Shopify shares saw continued pressure to the downside after a weak outlook in a November earnings release dinged optimism. At the start of the year, the selloff accelerated as shares got caught up in wider concerns around software stocks that investors perceived to be at risk of disruption from new artificial intelligence tools. 

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Even with the selloff, Shopify still commands a much higher multiple than the broader market. Canada-listed shares closed at C$164.84 or about 60 times forward earnings. In comparison, the technology-heavy Nasdaq 100 index trades at around 24 times earnings and the S&P/TSX Composite Information Technology Index at 31.

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Still, the multiple compression has been enough for investors focused on Shopify’s long-term prospects to buy the dip. 

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“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,” Sam Baldwin, senior portfolio manager at Guardian Capital LP, said by phone. His team recently bought into Shopify as a new position after its pullback, he said.

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Shopify’s still-premium valuation will be tested again next week when Shopify reports first-quarter results, due before the market open on Tuesday. Analysts on an average expect the company to report a 31% jump in both profit and revenue, according to data compiled by Bloomberg. 

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Even a solid report would not be enough to move Gallagher, especially as he sees the company’s high revenue growth rate cooling to a more sustainable mid-teens rate in the coming years. “I fully expect them to have a good quarter next week,” he said. “I’m not sure if there could be new information that would make me change my rating.”

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That’s because the valuation is still too high, and unlikely to fall significantly unless shares come under more pressure following results. Gallagher has a price target of C$163.51 on the stock.