Shopify counters short-seller’s attack
Firm accused of dishonest marketing ‘vigorously’ defends business model
Shopify Inc. fired back Thursday after being accused by a U.S.-based short-seller of promoting a “get rich quick” scheme.
“We vigorously defend our business model and stand resolutely behind our mission and the success of our merchants,” said Shopify in a statement.
The Ottawa-based e-commerce company was responding to allegations levelled in a report and video released Wednesday by Citron Research, after which Shopify’s stock had dropped 11.5 per cent on the Toronto Stock Exchange. The stock closed down 2.14 per cent Thursday, at $126.19.
Shopify’s statement put forward several numbers outlining how it is “helping businesses start, succeed and scale.” The company said that “every 90 seconds a store using Shopify makes their first sale,” that over 131 million consumers have made a purchase at a store using Shopify over the past year, and that stores using Shopify churned out US$10.7 billion in gross merchandise volume in the first six months of 2017.
“Shopify has always strived to take the path that leads to more entrepreneurs by designing its platform to remove the technical, operational, and financial barriers to enable anyone, anywhere, to build, grow, and scale a business,” the company added.
Citron’s allegations came amid a steady surge in the price of Shopify’s shares, which had risen more than 284 per cent since their 2015 debut. The stock had been up more than 133 per cent this year alone before, outstripping the S&P/TSX Composite Index by a wide margin.
But Citron and managing editor Andrew Left had highlighted YouTube videos referencing the “Shopify millionaire” and touting the company’s websites.
“They’re not selling them to business owners, they’re selling them to people as opportunities to get rich quick,” said Left in the video. Both he and the report 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 agency had accused Herbalife of having “deceived consumers into believing they could earn substantial money selling diet, nutritional supplement, and personal care products.” The settlement with the FTC 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.
Brian Belski, chief investment strategist at BMO Capital Markets, told BNN on Wednesday that he had been asked about a month ago why he didn’t own Shopify, and said it was because “I don’t understand the company.”
“We like to buy companies that we understand,” Belski added. “I believe that we’re heading into a period of investing that you want to own transparent assets. I just don’t know how they make money. I don’t understand the model.”
Shopify offers online stores, point-of-sale systems, and support services to merchants.
National Bank Financial analyst Richard Tse wrote in a report Wednesday that the risk to Shopify’s financials was with “transient subscribers who do not represent a meaningful portion of value for Shopify.”
“In our view, we can’t unequivocally rule out that this negative report will not surface some regulatory scrutiny even if we think it’s remote,” wrote Tse. “In the shortterm, there’s little doubt it will weigh on the stock despite what we believe to be an unchanged fundamental outlook.”
Tse also said that the situation could “open a window” for investors who may have missed out on the steady rise of Shopify shares.
Shopify said in its statement that it is “committed” to fighting against the decline of entrepreneurship.
Shopify’s growing community of entrepreneurs includes makers, creators and innovators, from students trying to pay for school to merchants who have successfully scaled their businesses,” the statement said.
Meanwhile, at least one law firm, California-based Girard Gibbs LLP, has said it is investigating the claims.