On Friday, Morgan Stanley raised its rating on Shopify (NYSE:SHOP) shares to Overweight from Equal-Weight, accompanied by an increase in the price target to $85 from $74. The firm's confidence in Shopify's growth durability is bolstered by the company's success in capturing more upmarket share and a disciplined approach to headcount management.
Shopify's strategic moves into larger markets and its growing international presence are expected to secure a compound annual growth rate (CAGR) of over 20% through the fiscal year 2030. The year 2025 is anticipated to be pivotal for Shopify's revenue, referred to as the "Year of the Take Rate," with projections that advertising could add approximately 100 basis points to the total take rate by 2030.
Morgan Stanley suggests that negative revisions to Shopify's fiscal year 2024 operating margins have been excessive. Analysts indicate there is potential for the company's margins to outperform current market estimates. Additionally, the firm considers Shopify's valuation to be reasonable when based on normalized free cash flow (FCF) for the calendar years 2024 to 2026.
Despite previous concerns regarding the sustainability of Shopify's margin expansion post their fourth-quarter results, Morgan Stanley sees an overcorrection in investor expectations. The firm notes that Shopify's modest headcount expansion forecast for the fiscal year 2024 should still enable further operating leverage and free cash flow growth. These factors contribute to Morgan Stanley's renewed endorsement of Shopify's stock.
The upgrade reflects Morgan Stanley's belief that Shopify presents a compelling long-term platform story. They highlight the potential for improved gross merchandise volume (GMV) strength and better operating margin expansion in the fiscal years 2024 and 2025, due to stable headcount growth. With the updated price target of $85, Morgan Stanley aligns Shopify's shares with the trading levels of the Large-Cap Software group.