Veritas Investment Research analyst Liam Gallagher, who issued the only sell rating on Shopify Inc. before its steep decline, has stated that it remains premature to re-enter the stock despite the recent selloff.
Gallagher's Bearish Stance Persists
Gallagher downgraded Shopify to sell in August when the share price surged to approximately 95 times forward earnings, a significant premium. Although shares initially rose over 20% to a record high in October, his caution proved accurate as the stock subsequently plunged more than 30% from its peak. Even after this downturn, Gallagher maintains his sell recommendation, the only one among 54 analysts tracked by Bloomberg covering the digital commerce platform.
"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."
Valuation Concerns Remain
Despite the selloff, Shopify's valuation remains elevated relative to the broader market. Canada-listed shares closed at $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 times. Gallagher argues that the multiple compression has not been enough to justify a buy rating.
However, some investors see opportunity. Sam Baldwin, senior portfolio manager at Guardian Capital LP, noted that his team recently initiated a position in Shopify after the pullback, citing a "much better business model and performance coupled with a much more attractive valuation."
Upcoming Earnings Test
Shopify's premium valuation will face a test when it reports first-quarter results next Tuesday. Analysts expect a 31% jump in both profit and revenue, according to data compiled by Bloomberg. Even a solid report may not shift Gallagher's view, as he anticipates the company's high revenue growth rate will cool to a more sustainable mid-teens rate in the coming years.
"I fully expect them to have a good quarter next week," Gallagher said. "I'm not sure if there could be new information that would make me change my rating."
Gallagher has a price target of $163.51 on the stock, indicating limited upside from current levels. He emphasizes that the price paid is the most critical factor for investment returns, and he views the current valuation as too expensive for generating strong long-term returns. "Our recommendation was kind of to wait for a pullback to where we view it more reasonably," he added.
