Shopify Stock: Has Citron Uncovered a Numbers Scheme?

SHOP stock - Shopify Stock: Has Citron Uncovered a Numbers Scheme?

Source: Shopify via Flickr

Shopify Inc (US) (NYSE:SHOP) shares have lost about 17% of their value since short-sellers Citron Research issued a scathing report that called it an affiliate marketing scam comparable to Herbalife Ltd. (NYSE:HLF). SHOP stock had gained 141% year to date before the Oct. 4 report knocked that rally off the rails.

The Canadian e-commerce software company should have called Citron’s claim a compliment, since Herbalife’s value has doubled since hedge fund manager Bill Ackman put out his famous short call almost five years ago.

To me, the Citron report looks scary enough to act on. Other InvestorPlace writers disagree. This is what makes markets.

So far, Shopify’s press shop has kept silent and has let its boosters do the talking. SHOP’s acolytes say the company’s total addressable market is even bigger than the company claims, that its churn rate is not a problem, and that its global push has barely gotten started.

Meanwhile, Citron founder Andrew Left says he is preparing another report on the company and management is expected to discuss Left’s reporting when it next reports earnings.

Who’s Right?

Who’s right? Who’s wrong? In time, the market will decide.

Citron is not Bill Ackman, a swaggering billionaire making big bets on his calls, and rival billionaires won’t come to Shopify’s defense. The decision is being left to smaller investors. Citron is best known for its October 2015 take-down report on Valeant Pharmaceuticals Intl Inc (NASDAQ:VRX). History says it was a good call, with VRX shares down 93% since.

The answer, for me at least, lies in Shopify’s financial statements. The company has lost money consistently, a reliable 10% of revenue since 2013; that trend has continued into 2017. The balance sheet shows no debt, but an unusual amount of cash and short-term securities, $935 million at the end of the June quarter.

So, where is this money coming from? Journey to the cash flow statements for the answer. It’s the line Issuance (Retirement) of Stock, Net, $566 million during the last quarter alone. What it means, in English, is that Shopify sold treasury stock, for cash, and put that money in its coffers.

In other words, Shopify is staying in business by watering down its stock. This is nice work if you can get it. Since the start of 2017 Shopify is up 126% despite these sales, even after the recent 20% hit caused by the Citron report.

For the September quarter, due to be reported Nov. 1, Shopify is expected to lose the same 10% of revenue as before, or 17 cents per share on sales of $166 million.

What’s Going On?

For me, the case against Shopify is made best by a piece put out by one of its boosters.

It starts with Instagram. The Facebook Inc (NASDAQ:FB) photo sharing site means that opening a shop is as easy as opening an Instagram account, putting up pictures of merchandise, and pointing to Shopify.

What Shopify has done, along with Instagram, is allow millions of people in the developing world to recruit one another, claim to build shops, and build businesses that may not have inventory, for the cost of a phone and an internet account, in other words for practically nothing.

This creates something Shopify calls growth. Revenues nearly doubled to $151.66 million between the June 2016 quarter and the same quarter in 2017. How much of that represents real commerce, and how much represents operators in Nigeria, Dubai or India running affiliate marketing schemes at one another?

I don’t want to find out. My money has more important work to do.

The Bottom Line on SHOP Stock

The globalization of the fast, mobile internet does enable new kinds of commerce to develop. It empowers people. But just as it empowers small merchants, it also empowers those who just want to get rich quick by preying on one another. It also seems to be fueling SHOP stock.

I’m saying thanks, but no thanks to that. Sell Shopify.

Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in FB.

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