Shopify Inc. (NYSE:SHOP) (TSE:SHOP) stock sank yesterday after short seller Citron Research released a report criticizing the Company’s business model
SmallCapPower | October 5, 2017: Shopify Inc. (TSX: SHOP) (NYSE: SHOP) fell more than 11% Wednesday on huge volumes (5x 90 day average) to a one-month low of $128.95 on the TSX after short seller Citron Research released a report setting the immediate price target at US$60 and raising questions about the Company’s business model. On the NYSE too, shares fell 11.6% to a one-month low of US$103.
Andrew Left, founder and managing editor of Citron, criticized Shopify’s business model as a mere “get-rich-quick scheme” and urged the U.S. FTC (Federal Trade Commission) to look into the Company’s claim that members can quit their jobs and become millionaires. Left also questioned the Company’s claim of offering e-commerce solutions to 500,000 merchants while there are only ~50,000 verifiable merchants working with Shopify. Left set a price target on Shopify stock at US$60, ~50% below the Tuesday’s close of US$117 on the NYSE.
In a brief statement on its website, Shopify said “we vigorously defend our business model and stand resolutely behind our mission and the success of our merchants,” while not directly addressing the accusations made by Citron Research.
Left is best known for his October 2015 report on Valeant Pharmaceuticals, accusing it of being a “pharmaceutical Enron,” and exposed the firm’s accounting irregularities with specialty pharmacy Philidor. In January 2017, he released a report on Express Scripts (NASDAQ: ESRX), accusing its drug rebate system as a financial engineering kickback scheme. Both these stocks fell considerably post publishing of reports by Citron.
Shopify makes money from subscription and payment processing fees by providing technology tools for merchants to sell online through their own websites and multiple third-party marketplaces including Amazon and EBay. It remains to be seen what the medium-term impact of Citron report will be on Shopify, which has been one of the best performing technology firms, up ~120% YTD and trading near all-time highs with a market cap of ~$13 billion. This outperformance in Shopify stock has been on the back of strong financial performance, including the latest results that beat analysts’ revenue estimates for the ninth quarter in a row and the Company raising its full year 2017 revenue forecast. However, Shopify has not turned a profit thus far and the valuations look stretched at current levels.
Notwithstanding Citron’s negative report, Shopify’s growth seems real and sustainable as more retail spending shifts online from physical stores. However, its stock price could see a meaningful correction with the latest criticism from Citron as well as the already rich valuations placed on its shares. This correction could accelerate if the allegations by Citron are investigated by the FTC, and if any fine is imposed on Shopify similar to the $200 million imposed on Herbalife on similar charges of “quit your job and enjoy a lavish lifestyle.”
Shopify reported a 75% jump in revenues to $152 million in 2Q17 and its TTM revenues stand at $509 million, implying a Price to Sales multiple of 25.6x.
Disclosure: Neither the author nor any of the principals at SmallCapPower, or their family members, own shares in the company mentioned above.
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