The Q3 2017 earnings report came and went Oct. 31 with neither Shopify Inc (US) (NYSE:SHOP) or Citron Research landing a knockout blow. Sure, SHOP stock dropped 9% after its earnings report, but once Citron analyst Andrew Left’s allegations of illegal marketing tactics and hit the news in early October, only Shopify CEO Tobi Lutke presenting a smoking gun was going to placate investors. He didn’t do that. Life moves on.

Lutke’s Big Problem

The short seller’s playbook is a simple one. Put together a 100-page dossier on the company in question and hope that you’ve made enough points with investors to plant a seed of doubt sending the weakest of hands scurrying for the exit.

If that happens you double down by presenting so-called “new” information that irrefutably proves your claims against said company — Shopify, in this case. Or, as is more often the case, you simply restate your position with confidence.

On Oct. 31, Citron released its rebuttal to Lutke’s conference call statements about Left’s allegations.

Let me take a second and address Left’s most important comments individually. Left’s are italicized; mine aren’t and follow his. Afterwards, I’ll bet you’re reconsidering buying Shopify stock.

Citron’s Rebuttal

We have no interest in going back and forth with Shopify, we are releasing this commentary as a response to the numerous media requests we have received.

First of all, why would Citron Research want to engage Shopify in a real discussion? To do so could quickly deflate its argument. Better to keep investors wondering knocking Shopify stock for a loss. As for the media requests, how many represent “numerous?”

Citron understands Shopify’s platform is effective for small and medium sized businesses to launch e-commerce platforms. We never doubted they have good software for accomplishing this task.

So, essentially, Citron’s admitting that Shopify has a real business that serves the needs of small and medium-sized businesses.

“A business is an organization or enterprising entity engaged in commercial, industrial or professional activities,” according to Investopedia. “A company transacts business activities through the production of a good, offering of a service or retailing of already manufactured products.”

Citron’s real problem is Shopify’s marketing plan.

That being said, we were unimpressed by the company’s response to Citron’s conclusion that Shopify sells business opportunities through affiliate marketers, and they depend on affiliate marketing to drive their growth metrics.

First, I’m not sure how much more clear Lutke’s response could have been to Citron’s assertion that Shopify sells business opportunities.

“I can definitely state that one, we do not sell business opportunities, we sell a commerce platform,” Lutke said in its Q3 2017 conference call with analysts.

As for the second part of Citron’s statement, two thoughts come to mind.

First, COO Harley Finkelstein addressed the whole affiliate issue on several occasions during the conference call. However, his best point had to do with Shopify Plus.

“One other thing that is worth mentioning is that a couple of quarters ago we mentioned the introduction of a new partner program around Shopify Plus,” Finkelstein said. “And those partners are tending to be much more larger agencies in some cases with hundreds of employees in those agencies and they are bringing us much larger merchants to Shopify Plus.”

I don’t know about you, but to me, this suggests Shopify’s attracting businesses that aren’t going to fail anytime soon, a good counterargument to the “get rich quick” thesis.

Secondly, a quick look at its Q3 2017 monthly recurring revenue (MRR) — up 64% to $23.7 million — suggests Shopify is attracting companies that are growing their businesses through its commerce platform. If they weren’t that number should be decreasing; it’s not.

It is impossible to understand the real strength of Shopify’s core business without getting specifics of their true customer acquisition cost. To accomplish that, churn needs to be analyzed, so investors can discount or strip out the dirty/illegal part of their business that will inevitably be curbed by regulators. Immaturity and hubris of management prevents them from addressing these issues.

Why would Shopify reveal its customer acquisition cost? To do so would give a competitor a roadmap to duplicating its marketing plan, something it’s spent years perfecting. Citron ought to be able to work backward using the two KPIs (gross merchandise volume (GSV) is the second) and sales and marketing expenses to get a back-of-the-napkin solution.

As for Citron’s claims of Shopify’s hubris, management immaturity or illegal business tactics, they might want to tread softly about these claims because karma can be a bitch.

Investors owning a stock selling at 15x sales deserve a clear and honest answer about all aspects of the business…especially what is driving growth.

I’m not sure what 15 times sales have to do with anything, but I think the company does a reasonable job explaining how it’s growing: by adding merchants to the platform which generates monthly subscription revenue that in turn generates payment processing fees from Shopify Payments.

And as Lutke stated in the conference call, by adding things like an Instagram shopping channel, its merchants gain access to a broader range of customers which increases GMV and potential revenue through Shopify Payments.

Citron has assembled a comprehensive folder, which we have forwarded to the FTC, and we are certain that the company will face an investigation for selling business opportunities.  

Ask Bill Ackman why this is false.

Bottom Line on Shopify Stock

Canada’s publicly traded tech companies have a terrible track record for flaming out, BlackBerry Ltd. (NASDAQ:BBRY) and Nortel come to mind, and Citron Research knows this.

However, Shopify has an obligation to shareholders to keep its eye on the prize and not waste time satisfying the whims of Citron Research.

Now, if Citron were long Shopify stock, that would be an entirely different matter altogether, but it is not. It’s throwing everything at the wall hoping something will stick.

Yes, Shopify is expensive, but you know what, you don’t have to buy it. But for Left and Citron Research to suggest Shopify needs to be more transparent is the pot calling the kettle black.

I’m sure this a long way from over, but most of the mudslinging won’t be coming from Shopify headquarters. I can guarantee you that.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.