Analysts are split on potential upside and downside scenarios for Shopify Inc., following the company’s latest move to reduce staff and offload a significant portion of its logistics business. 

On Thursday, the Canadian e-commerce company announced it entered into an agreement where Flexport Inc. will acquire the majority of Shopify’s logistics business. The company also outlined plans to reduce its workforce for the second time in 10 months after previously stating in February that no more staff cuts were imminent. 

In a television interview with BNN Bloomberg Thursday, Josh Beck, a managing director Keybanc Capital Markets, outlined the bullish case for the company, while New Constructs Chief Executive Officer David Trainer believes the stock is overpriced.

After Thursday’s announcement, Beck increased the price target to US$65 from US$55 on Shopify shares.

Following Thursday’s announcement, Shopify shares were trading nearly 25 per cent higher just below $80 per share in early-afternoon trading. 

THE BULLISH CASE 

Beck said the recent move by the Ottawa-based company is a positive sign for the business.

“To me, with them [Shopify] really lightening up on the investment mode and focusing on really what they're best at, which is software, [this] is actually a really encouraging update for them,” he said.

Beck said the recent move reflects what that market wants to see, “which is profitable growth.”

Shopify now faces room to grow its penetration in a multi-trillion-dollar global market, according to Beck.

“As successful as they've [Shopify] been, the penetration is still very low. And they're making really good progress with a lot of new products,” he said.

Shopify also has a “multitude of factors,” that could spur the company’s growth, Beck said. 

“Lots of companies are narrow. They may be selling one piece of subscription software, or one piece of fintech or one piece of ad tech, which is pretty narrow,” Beck said. 

“What they [Shopify] do is very broad and it gives them a lot of opportunity to have much higher revenue yield over time.” 

THE BEARISH CASE 

While Beck sees the potential for growth, Trainer said that Shopify shares are overvalued and oftentimes, good companies are not necessarily good equities to own.

He said if you look at underlying expectations that come with a “high $50 stock price,” you “see just how ridiculous the valuation is.” 

“To justify a $58 stock price, Shopify has to grow revenue at 25 per cent compounded annually for a decade, while improving its return on invested capital from negative to positive 300 per cent,” he said. 

According to Trainer, only a handful of companies have ever been capable of achieving a 300 per cent return on invested capital, with none being able to sustain it. 

“So that's what's being priced in, it's good to see them [Shopify] making some moves to rationalize the business because they'd been burning tons of cash flow. They burned $2.8 billion in the past year,” he said. 

Many companies completed an initial public offering (IPO) during an era of lower interest rates and “cheap money,” Trainer said adding that these types of organizations are “never really good stewards of capital.” 

In May 2015, the Ottawa-based e-commerce company completed its IPO at a price of US$17 per share.

Trainer said he could see more reasonable value in Shopify shares priced around $10, provided the company also improved its profit margins.

“And that would imply, to get the 10 bucks a share…that their [Shopify’s] profit margins would go from negative 10 per cent or so to positive 10 per cent. And grow revenue at consensus rates over the next couple of years, and then about 10 per cent after that,” Trainer said.