Timing is everything in the stock market. Unfortunately, sometimes that timing isn’t on your side. On Wednesday morning, I called Shopify Inc (US) (NYSE:SHOP) the most exciting stock in the market. Hours later, famed short-seller Citron Research called the company a “get rich quick” scheme and slapped a $60 price target on the shares, about 50% below where SHOP stock was trading at the time).
It goes without saying that Citron’s bearish report held a lot more weight than my bullish article. SHOP stock plunged more than 11% following Citron’s report, and another 4% yesterday, to hover right around the critical $100 level.
But it also pays to remember that Citron’s bearish reports tend to be overly ambitious on the short side. They target hyper-growth, momentum stocks, and slap outrageously low price targets on those stocks. The bearish reports tend to hit these hyper-growth stocks for a few days before the Citron story fades into the background. Investors then begin to pay attention to the fundamentals again.
From this standpoint, here is what I think happens to Shopify stock over the next several months: The bearish Citron report will likely hang over the stock until the company reports third-quarter earnings, which are due at the end of October. Those numbers will likely be very good and look a lot like second-quarter numbers. SHOP stock will bounce up big, and the uptrend will resume.
Citron Report Doesn’t Make Much Sense
The Citron report says a few things about Shopify’s business, none of which are positive. Firstly, Citron calls Shopify a “get rich quick” scheme which illegally leverages a promotional partner network to recruit the majority of its merchant base. Secondly, Citron says that Shopify has been unable to successfully leverage operating expenses. Thirdly, Citron calls out Shopify’s valuation as too rich and thinks that SHOP’s sales multiple should be cut in half.
But does the report hold much weight?
None at all, actually.
To begin with, Shopify is far from a “get rich quick” scheme. The company is an enabler of e-commerce for hundreds of thousands of small- to medium-size businesses around the globe. These businesses would naturally be eaten alive by Amazon.com, Inc. (NASDAQ:AMZN) and other online retail behemoths in today’s rapidly consolidating retail world if they didn’t have Shopify.
Shopify gives entrepreneurs a tool to level the playing field, and in this sense, its product is both necessary and beneficial.