Shopify shares take a tumble following short-seller attack
Firm peddling a ‘get rich quick’ scheme, Citron alleges, halting stock’s strong run
Shares of Shopify Inc. took a hit Wednesday after a U.S.-based short seller accused the online store provider of promoting a “get rich quick” scheme.
Citron Research didn’t seem to take issue with Shopify’s technology — “We would even go as far as to say that it is the best buildyour-own eCommerce software on the market,” it said in a post on its website Wednesday — but instead took aim at the company’s alleged marketing tactics.
The allegations come as more and more shoppers are making their purchases online, and amid a strong run for Shopify’s stock price. Shares of the Ottawa-based company had surged more than 284 per cent since their 2015 debut, and were up more than 133 per cent this year alone.
However, the stock closed Wednesday at $128.95 on the Toronto Stock Exchange, down 11.5 per cent for the day.
In a report and video published online, Citron and managing editor Andrew Left likened Shopify to Herbalife Ltd., which agreed in 2016 to restructure its business and pay $200 million to settle allegations made against it by the Federal Trade Commission (FTC).
According to a FTC press release dated July 2016, the FTC had accused Herbalife of having “deceived consumers into believing they could earn substantial money selling diet, nutritional supplement, and personal care products,” and the settlement prohibited Herbalife from claiming that its members could “‘quit their job’ or otherwise enjoy a lavish lifestyle.”
Citron noted Shopify had posted on its Facebook page that “2,700 people become millionaires each day,” and said there were 92 mentions of the word “millionaire” on Shopify’s website.
The report pointed out that Shopify also offers a sample of a resignation letter on its website, and directed readers to YouTube videos referencing “Shopify millionaire” and touting Shopify websites.
“They’re not selling them to business owners, they’re selling them to people as opportunities to get rich quick,” said Left. “This is a business opportunity and this will require the same business opportunity disclosures that others have in this country.”
Citron said its price target on Shopify was US$60.
The FTC and Shopify did not immediately respond to requests for comment.
Citron’s report is “largely offbase” and the falling share price creates a buying opportunity, said Colin Sebastian, an analyst at Robert W. Baird & Co.
Sebastian said he surveyed Shopify sellers and more than 90 per cent said they hadn’t seen an ad claiming they could become millionaires, and a survey of Shopify ads found only 1 of 20 contained the world “millionaire.” “We view the short call as a new overhang on shares, but also a buying opportunity for investors as we view the report as perhaps significantly overstating the impact of ‘millionaire’ ads as a driver of Shopify’s business,” Sebastian wrote in a note.
Kevin Krishnaratne, an analyst with Paradigm Capital Inc., said Shopify beat analysts’ revenue estimates for the ninth quarter in a row in the latest earnings report, boosted forecasts for the current quarter and signed up a record number of new merchants.
“They continue to go to the topline and so we still see that profitability coming in 2018,” Krishnaratne said. He is one of 18 analysts who has a buy rating on the stock, along with 12 holds and one sell, according to ratings compiled by Bloomberg.
Krishnaratne said he doesn’t think the majority of Shopify’s user base thinks they’ll become millionaires. “The company appears to appeal to users that maybe have a day job already and are kind of side-gigging.”
We view the short call as a new overhang on shares, but also a buying opportunity for investors.