Inside the Market’s roundup of some of today’s key analyst actions
Touting it as a “good idea” for investors to take advantage of a likely rebound in the North American application software industry, Citi analyst Tyler Radke added Shopify Inc. (SHOP-N, SHOP-T) to the firm’s “U.S. Focus List” on Wednesday, believing “the stock’s event path [is] offering accelerating (albeit mechanical) revenue growth in 2H24 with profitability set to inflect in 2025.”
In a research report titled On the Right Side of AI, Growth and Margins Heading into 2025, Mr. Radke said he sees the Ottawa-based e-commerce giant enjoying 63-per-cent year-over-year earnings before interest and taxes (EBIT) growth in the current fiscal year, narrowly above the consensus expectation on the Street.
“Shopify also avoids the ongoing macro/AI-induced budget uncertainty as more of a ‘downstream beneficiary’ of AI trends ... In addition, we’re encouraged by recent eCommerce trends that have shown more resilience in May, which is a positive. We raise our estimates on slightly lower spending and seasonality,” he said.
Mr. Radke also expects near-term investments to “give way to 2025 operating income inflection.”
“Shares of SHOP are down 20 per cent year-to-date (vs. up 7 per cent for IGV [iShares Expanded Tech-Software Sector ETF]) as Shopify’s investment cycle pressures margin expansion in 2024,” he said. “Shopify’s 10.8-per-cent OPM in 1Q24 (vs. 18.5 pe rcent in 4Q23) disappointed investors as the company ramped performance marketing spend to drive incremental growth in 2025+. We view increased marketing spend as a net positive given the favorable ROI on these investments with gross profit payback periods currently well under Shopify’s 18-month guardrails. Though a headwind to operating margins in the short term, we remind investors that this spend is incremental to ‘25 revenue growth and can be turned off at any time. We expect these investments to drive meaningful returns as Shopify diversifies from paid search to other channels such as podcasts, tv commercials, etc. While year-over-year improvements in operating income growth stall out in 3Q24, we believe operating income growth can inflect in ‘25. We model operating income growth of 63 per cent year-over-year in 2025, approximately 20 basis points faster than consensus. Our analysis ... attempts to separate performance marketing spend from total operating expenses and suggests that performance marketing spend could be easing (meaning our operating expense estimates could be conservative). In addition, core operating expenses continue to show leverage with headcount growth remaining limited.”
The analyst thinks Shopify as an “indirect beneficiary of AI without demand pressures of traditional software.”
“Unlike some of its SaaS peers (CRM, HUBS, WDAY, etc.) that are seeing outsized macro + AI induced indecision headwinds, we see Shopify as more immune from this AI ‘crowding out’ effect,” he said. “Shopify is mission critical in assisting SMBs/enterprises complete creative and operational tasks from store building, marketing, and customer targeting to customer support, shipping, etc., which reduces the need for merchants to adopt 3P solutions. We consider Shopify a ‘downstream’ beneficiary of AI as it’s not directly monetizing from AI, rather, it’s empowering its merchants which translates into its own growth. Shopify’s AI tools (Shopify Magic and Sidekick) help merchants enhance the buying experience for its customers while accelerating sales, which ultimately drives Shopify’s total GMV. We believe Shopify’s AI tools serve as a conversion tool for Pro merchants and a catalyst for Merchant Solutions. We’re modeling $10.6-billion in Merchant Solutions revenue by FY26 (10 per cent higher than consensus) driven by solid traction with newer offerings (Shop App and Shop Pay, Audiences and Campaigns, Markets, Tax, Commerce Components, etc.) and our conversations with management, merchants, and partners indicating Shopify’s strong adoption and early success broadening its TAM into on-premise retail stores and B2B eCommerce. Shopify’s offline customer sales grew 32 per cent year-over-year in 1Q24 (vs. total GMV up 23 per cent), growing 1.5 times online revenue and 1Q24 B2B GMV grew by 130 per cent year-over-year, after having doubled in ‘23.”
After raising his earnings expectations for both fiscal 2024 and 2026, Mr. Radke seeds an “attractive” entry point to Shopify with the risk-reward proposition in favour of investors. Maintaining his “buy” recommendation, he increased his target by US$1 to US$96. The current average on the Street is US$75.49, according to LSEG data.
“Shares of SHOP are off 30 per cent from year-to-date highs and 3 per cent since reporting 1Q24 results on May 8 (vs. 4 per cent for the IGV), giving back all its gains since November 15, 2023, given a weaker-than-expected 2Q24 guide combined with elevated marketing spend throughout FY24,” he said. “While last quarter was an expectations miss, we’re confident that Shopify’s growth engine remains robust, and we believe shares are largely undervalued vs. large-cap growth peers, on a growth adjusted basis.”
“Our confidence is underpinned by a more resilient e-commerce backdrop and accelerated share gains up market. Our Deep-Dive analysis into SHOP’s Merchant Solutions business gives us confidence in SHOP’s long-term growth as take-rate expansion accelerates in 2025+ fueled by new product/feature adoption going mainstream. With shares off 20 per cent or more from year-to-date highs and trading at a discount on growth adjusted valuation (vs. large cap peers), we see an attractive entry point.”
The Shopify report came alongside the release of Mr. Radke’s look at the broader North American Application Software industry titled Rumors of Software’s AI Death Are Greatly Exaggerated: Taking a Glass Half Full View on 2H of 2024.
“After a painful start to the year for the sector with high profile misses/guidance cuts and growing fears of software demand being disintermediated by AI, we’re providing a post-mortem and views on what to do next,” he said. “Our assessment is a mostly ‘glass-half full’ view. We attribute the bulk of recent challenges to seasonality and IT budget/interest rate head fakes coming into 1Q24 from 4Q23. However, we wouldn’t rule out select GenAI re-prioritization, which is something we think may persist at traditional SaaS/seat-based models. Bottom line, we’re buyers of the pullback in software and believe the sector is well positioned to outperform into year end with improving IT budgets, a more favorable rate backdrop, traditionally stronger positive estimate revision seasonality, and incremental GenAI monetization trends across our coverage. Our top picks are SHOP, MDB, and ESTC.”
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Three of the analysts on the Street covering Slate Office REIT (SOT.UN-T) downgraded their recommendations for its units in response to news it has defaulted on $158-million worth of debt, complicating management’s restructuring plan that involved selling off properties to generate cash for debt repayment.
Moving his rating to “underperform” from “sector perform” previously, RBC’s Tom Callaghan sees visibility remaining “poor” on Slate’s execution of asset sales in support of the Portfolio Realignment Plan as well as the continued availability and the cost of financing.
“Slate Office noted that it continues to progress with respect to its Portfolio Realignment Plan, with dispositions up to 40 per cent of GLA [gross leasable area] targeted through 2025,” he said. “No further details were provided on this front. Recall, as previously disclosed with Q1 results, SOT disposed of two properties during the quarter for gross proceeds of $30.2 million with a further sale completed post quarter for $10.4 million. The REIT pointed towards sales generally being completed 30-40 per cent inside of IFRS values. $344 million was classified as held for sale at Mar-31 ($234 million in related debt) via 14 properties.”
Seeing “uncertainty around visibility on the path forward,” Mr. Callaghan dropped his target for Slate to 30 cents from 70 cents. The average is 36 cents.
Others making changes include:
* CIBC’s Sumayya Syed to “underperformer” from “neutral” with a 0-cent target, down from 75 cents.
“Lack of progress in lender negotiations, including notices of default, and a challenged fundamental backdrop are significant headwinds for Slate Office,” she said. “Prospects for proceeds from asset sales are limited, and we do not expect them to alleviate the pressure on the balance sheet given where loan-to-value stands. We view the REIT’s ability to continue as a going concern as uncertain, and we downgrade SOT to Underperformer. We lower our NAV to $0.50/unit, and subsequently lower our price target to $0.00/unit, reflecting our expectation that the REIT ceases to be a going concern.”
* TD Cowen’s Jonathan Kelcher to “sell from “hold” with a 25-cent target, down from 75 cents.
“Slate noted that it continues to work with its senior lenders and is hoping to get an amendment to its loan covenants over the near term. That said, we do not believe this will result in interest payments resuming on the converts. We do not believe that the senior lenders will force Slate into receivership as: a) in our view, they would be less likely to get full value for the assets in the current market; and b) Slate remains current on its interest payments. However, we believe the risk of bankruptcy has increased following [Tuesday’s] announcement, and we see it as prudent to lower our rating,” said Mr. Kelcher.
* BMO’s Jenny Ma to “underperform” from “sector perform” with a 30-cent target, down from 70 cents.
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National Bank Financial analyst Adam Shine swung his second-quarter financial expectations for Telus Corp. (T-T) from “above Street expectations to below as pricing tactics continue to disappoint and undermine sector growth and margins as well as valuations” on Wednesday.
Previewing the Aug. 2 release of its results, Mr. Shine is now projecting total revenue of $4.959-billion, up 0.3 per cent year-over-year and below the $4.995-billion expectation on the Street. Adjusted earnings per share is forecast to rise 21.6 per cent to 23 cents, a penny above the consensus.
“While we look for 2Q revs to improve over negative 0.6 per cent in 1Q, more traction out of verticalization strategy only comes post-1H, with Telus contending with greater competitive intensity in wireline and wireless after Rogers bought Shaw and Quebecor acquired Freedom on 4/3/23,” he said. “Restructuring savings of over $325-million were to be achieved exiting 1Q24 with ongoing efforts to extract M&A synergies also helping to mitigate top-line pressures.”
Mr. Shine sees Telus’ Wireless business continuing to “disappoint” on pricing, adding: “We expect Mobile Network Revs up 2.0 per cent, with 93K vs. 110K Phone adds (Public Mobile (PM) rebranded 5/31/23, loading skewed to flanker brands as well PM with focus on AMPU given efficiencies), and ARPU [average revenue per user] down 2.5 per cent amid ongoing elevated competitive intensity, reduced roaming & overage decline (bigger data buckets). We have Phone Churn up 19 basis points to 1.10 per cent given more consumer activity and promotions. We expect Mobile Equipment down 4.1 per cent (lower device renewals/upgrades). More rational competition is required sooner than later.”
Maintaining an “outperform” recommendation for Telus shares, the analyst reduced his target to $23 from $25. The current average is $25.23.
“Besides forecast changes, we reduced TTech’s multiple 50 basis points in NAV amid overly aggressive competitive pricing dynamics that have left investors unimpressed and materially hurt telecom shares,” he concluded.
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In a separate note, Mr. Shine lowered his second-quarter forecast for BCE Inc. (BCE-T), seeing “solid” wireless additions but emphasizing average revenue per user is expected to be “worse” and churn higher.
“Immigration keeps subscriber loading at robust levels, but competitive intensity remains elevated and more aggressive promotions return in final month each quarter,” he said.
He’s now projecting revenue to slid 0.6 per cent year-over-year to $6.032-billion, narrowly below the Street’s $6.105-billion estimate. He sees adjusted earnings per share falling 0.9 per cent to 78 cents, matching the consensus.
“While we have higher Media expectations given a likely advertising boost from evolving Euro 2024, we now expect even weaker Wireless ARPU amid ongoing competitive industry pricing tactics that seem excessive and are undermine growth,” he said. “We anticipate restructuring savings of more than $35-million after $16-million in 1Q, as workforce reductions should step-up in 2H and savings build to $250-million run-rate ($150-$200-million in 2024). Rest of amount owed ($414-million) for 3800 MHz spectrum paid on May 29.”
Keeping an “outperform” rating for BCE shares, Mr. Shine lowered his target to $50 from $52. The average is $50.06.
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Touting its “compelling” valuation and “right leverage to copper,” BMO Nesbitt Burns analyst Jackie Przybylowski upgraded Ero Copper Corp. (ERO-T) to “outperform” from “market perform” previously.
“Ero has underperformed its closest peers over the past year, and the stock is expected to have relatively low leverage to copper prices in the short term - it will not experience the same downside risk of falling copper prices (although we are now forecasting a more modest decline as per our updated commodity price outlook) and investor sentiment,” he said. “Further to the improved return to our target, we also see upside not yet reflected in our estimates.”
Ms. Przybylowski said her move was in response to the fact that her target for Ero shares is “now significantly more compelling,” rising from 8 per cent on May 21 to 39 per cent as at June 24 close. He attributed that difference to share price depreciation and an increase to his target price (from $37 to $41).
“The market is rewarding low risk growth. Ero Copper delivers this,” she said. " Brazil continues to be supportive of mining. Ero also has lower leverage to near-term copper prices versus closest peers under coverage, which should benefit if spot copper prices peaked in April/May and will continue to be flat or slightly down through H2/24 and 2025. Ero continues to benefit from the inflection to higher copper production and lower costs, beginning H2/24 (as noted in our marketing recap and Q1/24 earnings notes), but we note this is low risk growth — the Tucumã project is nearly completed and Pilar shaft sinking is progressing on schedule.”
“While our current estimates and commodity / currency price assumptions are sufficient to justify rerating to Outperform, we see opportunity for Ero to exceed our current expectation ... These catalysts may not translate to strong Q2/24 earnings as the company continued to complete projects and improvements, but we expect meaningful improvement in H2/24 and in future years.”
Her new $41 target exceeds the $35.39 average on the Street.
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Seeing the heap leach pad failure at its Eagle gold mine in the Yukon putting its ability to make debt repayments into question, Desjardins Securities analyst John Sclodnick downgraded Victoria Gold Corp. (VGCX-T) by two levels to “sell” from “buy” previously.
“With just a brief press release and no word from management, we remain concerned about VGCX’s ability to make its quarterly debt repayments as operations are suspended for an unknown period,” he said.
Mr. Sclodnick noted the Whitehorse-based company ended the first quarter with $233-million in debt and $28-million in cash. He also emphasized $148-million in positive working capital is largely in the form of $225-million of inventory “with uncertain timing as to when that could be converted to revenue.”
“It is expected to continue making quarterly term loan debt repayments of $11-million until it is due September 30, 2024,” he said. “If we assume VGCX suspends its exploration and growth capex projects, then we estimate its operations could be suspended until mid-August at the latest, at which point the cash balance would remain just above zero; note that this does not yet factor in clean-up costs. If we assume clean-up costs of 25 per cent of the total stacked tonnes on the leach pad so far, then we estimate clean-up costs of $70-million.
“In order for the company to continue as a going concern, we model it completing a $75-million equity financing in 3Q — a very risky proposition which has caused our NAV estimate to fall 20 per cent. Given its still-elevated debt levels, the degree of uncertainty on the timing of resumption of operations and clean-up costs, we would look to join the likely stampede for the exits [Tuesday] morning.”
With steep reductions to his earnings and cash flow expectations, the analyst dropped his target to $6.75 from $15.75. The average is currently $11.75.
“Given the current uncertainty around the timing of the restart of operations and with no word from management on the severity of damage to infrastructure or the clean-up costs, combined with the company’s elevated debt levels and near-term debt repayment obligations, we are downgrading our rating,” he concluded.
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In other analyst actions:
* In a report titled This is Just the Beginning at Lunahuasi: DCF Displays Deep Value, Ventum Capital Markets’ Connor Mackay raised his NGEx Minerals Ltd. (NGEX-T) target to $13.50 from $12.75, above the $12.15 average, “on the back of the Company’s wildly successful 2023/24 drill season.”
“Lunahuasi’s potential is simply astounding given the grade and scale of mineralization intersected to date,” he said. “We model a DCF10-pr-cent estimate of US$2.3-billion (C$15.30 per share) for Lunahuasi alone, boasting a peer-leading 82-per-cent IRR. We model a two-phased approach to development based on a small-scale, very high-grade operation in Phase 1 that funds a larger bulk underground mine in Phase 2. Given the grade profile, we see payback of initial capex in less than one year.
“Our modelled valuation displays remarkably low sensitivity to capex and opex pressures. We also note that Spot metal prices are currently 20 per cent above our base case assumptions, corresponding to an 40-per-cent higher implied valuation for the project.”
Keeping a “buy” rating, Mr. Mackay added: “We see strong potential for NGEx to continue growing the deposit in future drill programs. Despite our models being tightly constrained around current drilling, all indications point to a much larger, and therefore more valuable, project than we estimate. Buy now while the stock is on sale.”
* Raymond James’ Rahul Sarugaser initiated coverage of Vancouver-based NervGen Pharma Corp. (NGEN-X) with a “market perform” rating and $3 target. The average is $4.50.
“We initiate coverage of NervGen (NGEN-TSXV), a clinical-stage biotechnology company developing what could be the world’s first drug to demonstrate functional improvement in patients with spinal cord injury (SCI) via its Ph 1b/2a program in chronic and subacute SCI: a potential game-changer in the lives of 700k patients in the U.S. + EU5 (approximately 2 mln worldwide; indeed, a Moonshot),” he said. “Given the higher-than-average risk associated with developing a drug for SCI, we remain conservative in our assumptions of clinical success until we see a clear clinical signal (Ph 1b/2a topline: 1H25) relevant to the endpoints of a potential registrational trial of NVG-291. So, today we launch coverage with a conservative $3 PT and MP3 rating. We do, however, highlight our scenario analysis: upon potential initiation of a Ph 3/registrational trial in 2027 (assuming positive Ph 2 readout in 2026), we then calculate NGEN’s valuation at up to $29/sh.”
* Following its Investor Day event, BMO’s Jeremy McCrea increased his NuVista Energy Ltd. (NVA-T) target to $18 from $17 with an “outperform” rating. The average is $16.41.
“We believe NuVista is one of the few E&P companies with ‘permission to grow,’” he said. “With top-quartile results, it is one of the few companies that is not penalized for a nodividend policy. A key reason is the infrastructure in place to support this growth, but more importantly, the superior results at Pipestone and Gold Creek. The investor day highlighted NVA’s extensive asset base, especially with new Lower Montney wells showing superior outperformance and a 9-per-cent revision upward to the 5-year growth plan.”
* CIBC’s Robert Catellier raised his Pembina Pipeline Corp. (PPL-T) target to $58 from $57, exceeding the $54.92 average, with an “outperformer” rating, while BMO’s Ben Pham bumped his target to $54 from $53 with an “outperform” recommendation.
“Sanctioning of the US$4B Cedar LNG project is consistent with recent messaging (timing, capex) and bolsters PPL’s integrated wellhead to tidewater network. Increasing natural gas demand from W. Cdn. LNG export projects (Cedar LNG being the latest), supports the rising WCSB production outlook, with PPL’s assets likely to benefit through higher utilization as well as need for additional infrastructure. We maintain our Outperform rating and our target moves to $54,” said Mr. Pham
* Following Tuesday’s announcement of a US$750-million financing package for its 100-per-cent-owned Eskay Creek mine in British Columbia’s Golden Triangle region, Scotia’s Ovais Habib cut his Skeena Resources Ltd. (SKE-T) target to $12 from $14 with a “sector outperform” rating, while Desjardins Securities’ John Sclodnick bumped his target to $20 from $19.75 with a “buy” recommendation. The average is $15.43.
“With Skeena now fully funded to commercial production (a major derisking event), we expect the stock to gradually re-rate to trade at a premium to peers, given the above-average production and below-average costs and superior jurisdiction vs the peer group average. We are maintaining our Buy rating, and SKE remains our top gold developer pick.