Though the odds are good anyone reading this already knows it, on the off chance someone isn’t yet aware, shares of Shopify Inc (US) (NYSE:SHOP) are down nearly 20% since early October thanks to a so-called “bear attack” from a well-known short seller. That is, Citron Research has publicly called out the e-commerce company, labeling it a “get rich quick scheme” that would sooner or later draw scrutiny from the FTC and, valid or not, such Shopify stock news headlines are the last thing any owner of SHOP stock wants to see.
Thing is, Citron’s Andrew Left is essentially right about Shopify. The other thing is, it doesn’t really matter.
If the names Andrew Left or Citron Research ring a bell, there’s a reason. Left, the lead (and seemingly only) analyst for Citron largely prompted the scrutiny of specialty pharmacy company Philidor, owned by Valeant Pharmaceuticals Intl Inc (NYSE:VRX). As it turned out, Philidor was more or less the scam Left said it was. Though Citron’s track record is hit and miss, Left has been right enough to turn heads when he makes a claim.
The latest claim? In an overly flamboyant way, Left claims that Shopify’s promise of riches to those who get involved as a distributor and recruiter of the affiliates is in violation of the Federal Trade Commission’s “Business Opportunity” rule that restricts painting overly optimistic pictures of how much money one could plausibly make.
Outside of Citron’s write-up, Left called Shopify’s marketing a “get rich quick” scheme that was “dirtier” than the mess Herbalife Ltd. (NYSE:HLF) found itself in not too long ago.
That is, like Herbalife, while Shopify’s business opportunity appears to be the establishment of e-commerce stores, the proverbial big money is in the recruitment of other sellers that generate residual income for the recruiter, with vague hints of turning those recruiters into millionaires. Even if the FTC doesn’t have enough hard evidence to work with there, the Citron Research report suggests Shopify stock has some serious valuation problems.
The question is, so what?
Let’s call a spade a spade — Shopify is selling a dream.
So, is the Shopify stock news on-point? Is SHOP using illegal marketing tactics in selling that dream? That’s a gray area to be sure, but is the marketing message remarkably more misleading than the TV commercials inviting consumers to participate in class action lawsuits that mostly enrich attorneys, but rarely pan out as well as expected for the actual plaintiffs?
Is a vision of a healthy cancer patient within a television commercial for a cancer drug some sort of unspoken guarantee of long-term survival? Does a young man that uses the Axe brand of personal-hygiene products actually expect to be besieged by young women, as depicted in Axe’s television commercials?
The answer to all these questions is, of course, no. The FTC tolerates the imagery simply because it knows it has to give consumers at least a modicum of credit in distinguishing the difference between a contract and a commercial.
And as for Shopify’s lack of profits, Shopify stock is in good company. Most young companies don’t turn a profit until after they’ve matured, but savvy investors know the time to get into some of them is before — not after — that fact. Here are five examples, with Amazon.com, Inc. (NASDAQ:AMZN) the most prominent of the rags-to-riches stories. It’s been one of the best long-term investments anyone could have made over the course of the past couple of decades.
Investors don’t care where a company is, they care about where it’s going.
Don’t misread the message. The FTC might crack down on Shopify’s advertising. The company might never turn a profit. The market might not care if Shopify does eventually turn a profit. Nobody really knows the future. That’s the speculative nature of stock-picking.
Andrew Left, however, seems to be grasping at straws with this one. Though he certainly rattled shareholders by generating some rather alarming Shopify stock news headlines, this time his claims are more bark than bite.
If your gut is telling you this may be a time to scoop up shares at bargain prices, you may want to trust your gut.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter.