Shopify Inc (US) (NYSE:SHOP) has been on a volatile ride since September. But of course, a key reason is Citron Research’s Andrew Left, who targeted the company for a short sale because of concerns about its marketing practices.
He noted: “Shopify says they have 2,500 Shopify Plus merchants out of their universe of 500,000. Now let’s say they have another 20,000 Shopify Advanced. The question I ask you, the question no one on Wall Street has addressed is who are the other 450,000 merchants on Shopify?”
Although, another issue is that Shopify stock was already vulnerable. Note that before Left’s moves, the shares had soared from $43 to $123. In other words, there were holders of SHOP stock that probably wanted to take some profits off the table anyway.
OK, so now what? Are Left’s allegations something to be feared? Or is there instead an opportunity here?
Well, to answer these questions, let’s first take a look at the recent Shopify earnings report. During the quarter, revenues spiked by 72% to $171.46 million, and the earnings came to 5 cents a share. The Street, on the other hand, was looking for $165.63 million in revenues and a loss of 1 cent a share. SHOP’s performance was its 10th consecutive beat, on both the top and bottom lines.
The mobile business also showed nice gains. About 74% of traffic and 62% of orders came from mobile devices in the third quarter.
Despite all this, Wall Street was still not so certain. Consider that Shopify stock fell from $109.36 to $99.49 on the earnings news.
Why? Keep in mind that it looks like the growth rate is decelerating. For Q4, SHOP is now projecting revenues of $206 million to $208 million, which implies a 57% increase.
There was also a slowing of the GMV (gross merchandise volume). It was up 69% to $6.4 billion in the latest quarter, compared to a 74% jump in the prior period. SHOP’s management blamed this on seasonal factors.
Shopify Stock vs. Left
On the earnings call, there was little discussion about Left’s accusations. Instead, management just dismissed his allegations.
Yet this seems like a major oversight. Why not go deeper into the marketing practices? Perhaps provide more information regarding churn?
Such information would likely ease some of the latent fears. Let’s face it, Left has a good track record when it comes to short selling, as seen with positions in companies like Valeant Pharmaceuticals Intl Inc (NYSE:VRX). Left is known to engage in intensive research.
As for SHOP, Citron has indicated that it has sent materials to the Federal Trade Commission (this is based on a report from Reuters). No doubt, this does not mean an investigation is imminent or will ever happen. But it is a cloud over Shopify stock, which could put a ceiling on its valuation.
Bottom Line on Shopify Stock
Shopify stock is fetching a nose-bleed valuation. Note that the shares trade at 21 times revenues. To put this into perspective, Facebook Inc (NASDAQ:FB) sports a multiple of 17X.
Now this is not to imply that SHOP does not have a solid product offering. Over the years, the company has been innovative, adding features like inventory management, logistics, analytics and fraud protection. SHOP also is poised to benefit from megatrends like e-commerce and the growth in self-employment. In fact, the company estimates that the market opportunity is at a whopping $58 billion.
But such things may not matter much, at least in the near term. It’s notable that the growth is expected to drop during the all-important holiday season, which seems a bit odd. And again, SHOP has done a poor job in explaining some of its market approaches.
So for now, it’s probably best to be on the sidelines with SHOP stock.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.