Why Loop Capital isn't budging on its Hold rating for Shopify

Shopify (SHOP) surged last week after reporting better-than-expected second quarter results and third quarter guidance. Loop Capital Markets managing director Anthony Chukumba joins Market Domination to discuss the stock's rally and his refrain from giving it a Buy rating despite raising its price target to $80.

"Tech stocks, in general, are just incredibly volatile. And Shopify stock prices are incredibly volatile. So we think it makes sense to sort of revisit that valuation, particularly on a relative basis once a quarter," Chukumba explains. "And, basically, what we found was that even after this big run-up that Shopify has had since they reported good second quarter results, the stock is trading at a pretty significant discount to the comp group on an enterprise value to revenue basis, even more so when you account for the fact that Shopify is generally growing their revenues faster than a lot of their comps."

From a fundamental perspective, he is concerned about whether Shopify will see significant and continued returns on its incremental marketing spend. In order for him to feel comfortable giving the stock a Buy rating, he would like to see a "more attractive entry point" at six or seven times revenues. "Then, we'd feel like we had some sort of margin for safety on the downside," he says.

As many investors have concerns about the state of consumer spending, Chukumba explains that the retail sector is "perennially a stock pickers market":

"You can have a good economy, bad economy, you still have to look at each individual stock and look at the specific catalysts, look at the management teams, look at the secular and cyclical trends, and certainly look at valuation."

He is particularly cautious about retailers that cater to the low-income consumer, as they are the group most under pressure by inflation.

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This post was written by Melanie Riehl

Video Transcript

All right, we're moving over to Shopify now.

It's been on a nice run recently, the stocks surging after reporting better than expected Q two results and Q three guidance last week, that performance has led our next guest to raise his price target for the company joining us now is Anthony Cumba Loop Capital Markets managing director, Anthony.

I just wanna start with sort of what you're looking at with shop by reading through the note.

It seems like it's a little bit of a valuation call.

You feel like the stock is undervalued.

I thought notable, you're not putting a buy rating on the stock right now.

So you're not really pounding the table here.

Can you just sort of break down why it's not necessarily a buy but what's attractive with the stock?

Sure, absolutely.

So this is something that we do on a quarterly basis uh for Shopify and quite frankly, just for Shopify, a lot of that has to do with the fact that tech stocks in general are just incredibly volatile and Shopify stock price is incredibly volatile.

So we think it makes sense to sort of revisit the valuation particularly on a relative basis once a quarter.

And basically what we found was that even uh after this big run up, that Shopify had since it reported good second quarter results, the stock is trading at a pretty significant discount to the um comp group um on an enterprise value to a revenue basis even more.

So when you account for the fact that Shopify is generally growing the revenues faster than a lot of their comp.

So, so that's why that's what really kind of led us to um uh to increase the price target.

Now, having said that even at our new price target, we don't think there's enough upside to justify a buy rating and that's why we stuck with the hold rating.

Um and Anthony, so what would, what would move you to a buy rating then on Shopify?

What do you wanna see from them?

Yeah, you know, I mean, look uh from a fundamental perspective, um there was a lot of concern the last couple of quarters about um some incremental marketing spend and were they going to get a sort of adequate return on the incremental marketing spend?

And what were the implications for long term profitability and free cash flow?

They started to answer that question um with these better than expected second quarter results that I alluded to.

Uh we'd probably like to see more of that.

Um Also, you know, look, we, we, we, we, we still are kind of value investors at heart, which is kind of tough at times when you're covering tech stocks.

But certainly, um, you know, if we could get the stock at a more attractive entry point, let's say more like six or seven times, um, revenues rather than nine times revenues.

Um, you know, then we'd feel like we had, uh, some sort of margin for safety on the downside.

Anthony.

A, a lot of the stocks in your coverage space have exposure to the consumer obviously, right, just general consumer spending and therefore sort of macro economy and, and the trends we're seeing there, all this talk about a consumer slowdown, recession, risks are rising.

I mean, what does that mean for the stocks that you're looking at?

Does it mean more for certain stocks than other stocks?

And does it give you sort of opportunities to play the space in, in more of a nuanced way?

Yeah, look what I say about um the retail spaces, it's a perennially a stock pickers market.

You can have a good economy, a bad economy.

You know, you still have to look at each individual stock and look at the specific catalyst.

Look at the management teams, look at the secular uh and cyclical trends and, and certainly look at, um, you know, valuation.

I mean, look one thing that we're definitely picking up coming out of um uh earnings at least for uh companies with year end.

So, you know, for the June quarter ends is that, that low income consumer is definitely very pressured.

Um You know, you've had this cumulative impact of inflation, uh whether you're talking for groceries, um you know, rent even car insurance.

Um So that is definitely making me um more cautious on uh retailers that cater to those consumers.

Seems like uh retailers that cater to high income consumers, you know, they, they tend to be hanging in much better.

I mean, certainly this surging stock market um helps them.

But, you know, I mean, I think you always have to kind of weigh that with valuation because in a lot of cases, you know, you might have a pessimistic fundamental outlook, but that's more than pricing the stock at current levels and, and, and you also have to think about, you know, investment horizon, right?

I mean, there may be great opportunities uh with beating down stocks if you truly have a longer term investment horizon and can kind of ride out the cyclical downturns.

Well, Anthony, you know, your, your coverage list is almost a barbell in some ways, right?

Because you cover stocks like Rh and William Sonoma on the high end, you cover the discounters like dollar general um on the lower end.

And so is that kind of how investors should be thinking about things right now?

That that's kind of what might work or do you think some of those higher end are gonna maybe see some trade down also?

Yeah, I mean, you know, you specifically mentioned Rh and William Sonoma and yeah, they definitely cater to higher income customers.

But once again, this goes back to what I was saying in terms of perennial stock pickers market, um you know, they're also heavily levered to uh existing home sales, right?

Because they sell a lot of furniture.

Uh And so, you know, even, even though that, that higher income consumers is faring better, they're not necessarily moving and if they're not moving, they're generally not buying furniture.

And so, you know, even though we've been positive on those stocks in the past, you know, we're at, we're at a hold rating for, for, for both of those stocks.

So, you know, I, it's just, it's just always kind of tricky, um, you know, with, with, with, with, with, uh, you know, retail stocks and that's why, you know, working this job has taken many years off of my life.

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