Shopify’s up-and-down day: A solid rise in revenue but then shares drop
CEO attacks claims by short-seller
OTTAWA — Shopify Inc. reported a solid revenue increase Tuesday, reached a crucial milestone a quarter earlier than anticipated and mounted a defence against “preposterous claims” by a “short-selling troll.”
But it failed to ease investor concerns as shares fell more than eight per cent.
The Ottawa-based e-commerce company posted its first adjusted operating profit as a public company in its third quarter ended Sept. 30 as its revenue grew 72 per cent compared with the same period last year.
Revenue for the company, which keeps its books in U.S. dollars, totalled $171.5 million, up from $99.6 million.
Shopify said it lost $9.4 million in the third quarter. That compared with a loss of $9.1 million a year ago.
CEO Tobias Lutke publicly addressed allegations made earlier this month by high-profile short-seller Andrew Left of Citron Research that sent shares falling more than 10 per cent on the Toronto Stock Exchange on the day his report was released.
The shares have since regained some of the ground, but shed $11.96 or 8.53 per cent Tuesday to close at $128.26.
Lutke attempted to ease concerns on a call with analysts that he used to address Left’s criticism of the company’s business model in a video published earlier this month.
“This is going to be a fun one,” Lutke said at the start of the call, explaining the company waited nearly a month to address the allegations because it does not engage in short-term stock management.
Rather, he said, Shopify reserves time each quarter to update analysts on any news.
However, the company stopped short of providing information on acquisition costs and “churn rate” that Left suggested would prove his hypothesis that the company is overvalued.
Shopify has about 260 employees in Waterloo who work on the Shopify Plus platform. Two weeks ago, it said it expects to add 300 to 500 in Waterloo in the next three to five years.
On Oct. 4, Left published a video alleging the company, which provides businesses with online checkout services, doesn’t comply with Federal Trade Commission guidelines and suggesting the stock’s value is closer to US$60 before any potential FTC involvement.
He compared the company’s practices, which he called a “good ol’ get-rich-quick scheme,” to Herbalife, a directmarketing company that a short-seller alleged was a pyramid scheme. The FTC investigated Herbalife and the company recently had to pay a US$200million settlement and make structural changes.
During the call, the CEO asserted the company sells an ecommerce platform — not business opportunities — and complies with FTC regulations.
Much of their content shows how hard — rather than easy — entrepreneurship is, he said.
“Implying that these businesses are somehow illegitimate is an insult to their hard work,” said Lutke.
Harley Finkelstein, the company’s chief operating officer, addressed concerns around the company’s affiliate partner program. In his video, Left iden-
tified several alleged Shopify partners attempting to woo future merchants with promises of self employment and milliondollar incomes.
Shopify has a team that approves individual affiliate partners who sign an agreement outlining their disclosure responsibilities, Finkelstein said.
“Those that don’t comply we simply kick out of the program,” he said, adding some of the alleged affiliates Left’s report alluded to are not partnered with Shopify.
Lutke added that Shopify consulted with outside legal counsel, who also believe the claims are unsubstantiated, and has not been contacted by the FTC.
Citron Research is “unimpressed” by the company’s response, it said, adding it has forwarded a comprehensive folder of its allegations to the FTC. “It’s impossible to understand the real strength of Shopify’s core business without getting specifics of their true customer acquisition cost.”
The company needs to release its churn figures — which indicate how many entrepreneurs stop using the platform — Citron Research claims, “so investors can discount or strip out the dirty/illegal part of their business that will inevitably be curbed by regulators.”