On Oct. 4, shares of Shopify Inc (US) (NYSE:SHOP) fell 11% after a bearish report was issued by Citron Research’s Andrew Left. On Thursday, shares are down even more and Shopify stock is down a whopping 20% in three days.
How far will it go?
What Citron Had to Say
Left is a notorious short-seller. Longs fear his comments, as he speaks on CNBC and issues reports or videos on his own site. Most famously, Left nailed the short sale in Valeant Pharmaceuticals Intl Inc (NYSE:VRX). Perhaps this is why so many fear his other short calls — he could be right, in devastating manner. Although, it should be noted he has a pretty notable bullish call on BlackBerry Ltd (NASDAQ:BBRY), saying it could double as he compares it to Nvidia Corporation (NASDAQ:NVDA).
In regards to Shopify, Left slapped a $60 price target on the stock — “and that is before they are caught red handed by the FTC.” Considering that on Tuesday, SHOP stock hit $120, this would be a massive decline. Amazingly, if Shopify stock was to drop to $60, it would still be up year-to-date. That tells you just how strong it’s been. Despite the recent decline, Shopify stock is up 123.5% so far in 2017.
So what exactly did Left say? Well, he called Shopify “a company that hides under the shroud of a cloud-based e-commerce solution for Small and Medium sized Business (SMB).” Adding that it “is the promoter of the hottest new ‘get rich quick’ scheme on the internet.”
Others have rebuked Left’s claims, saying that he’s not spinning a fair picture. One even called his claims “all smoke and no fire.”
I, unfortunately, cannot say whether Left’s claims are true and if the FTC will come knocking. I can, however, look at Shopify stock through a fundamental lens, which tells me that 2016 revenue should grow 66.5% to $648 million in 2017. Analysts expect sales to grow another 40% in 2018 to $907.4 million.
On an earnings basis, the expectation is that Shopify will lose 4 cents per share for full-year 2017. However, that should grow to a 21-cent-per-share profit in fiscal 2018. While these earnings are small, the story is rarely about the bottom line when it comes to young, fast-growing tech companies.
Despite the lack of earnings, I have a real big problem with Shopify stock: the valuation. On a forward basis, shares trade at some 475 times next year’s earnings. That’s obviously insane, and basing its valuation on earnings is not a good metric to use for SHOP anyway. However, its sales valuation? Equally insane.
Shares trade at 19.4 times SHOP’s trailing sales figures, and that’s after the recent plunge. In this regard, it sort of reminds me of Snap Inc (NYSE:SNAP). Despite a big pullback, the valuation is still way too high. Maybe SHOP will grow into its valuation (and with strong sales growth it might), but I am hesitant to be the one to find out.
The Bottom Line on Shopify Stock
If Left is right (no pun intended) and SHOP gets hit with an investigation, Shopify stock is in big trouble. As it stands, his report could have scared off some weak-hand investors and that may keep SHOP stock under pressure — not to mention the fact that it’s still up more than 100% on the year and it wouldn’t be surprising to see investors locking in profits.
My take? There was a huge volume day when the selloff began on Wednesday. That’s got me hesitant, but there could be a good setup approaching. Around $80 to $85 has been solid support, after previously serving as resistance (albeit, just temporarily).
A pullback to this level would also find the support of the 200-day moving average. However, it would require a decline of another 14% to 17%.
That’s why I’m not a buyer today.
I’d rather miss the rebound in search of a great entry than start a position now and risk greater downside.