Here’s Why Not to Buy Shopify Inc Stock on the Dip

SHOP stock - Here’s Why Not to Buy Shopify Inc Stock on the Dip

After a big run through September, Shopify Inc (US)(NYSE:SHOP) stock has lost some of its mojo. Yet this should really not be surprising if you follow SHOP stock. After all, there has been a spike in volatility with the tech growth stocks lately.

We’ve seen the same with operators like NVIDIA Corporation (NASDAQ:NVDA) and Square Inc (NYSE:SQ). So what now? Might there be an opportunity with SHOP stock? Or is it better to hold off for now? I think investors should be leery. If anything, they should wait for a more meaningful correction.

One reason is the attack from short seller Andrew Left, who operates Citron Research. Granted, his track record is far from perfect (then again, whose is?), but it is important to keep in mind that he does engage in-depth research.

This was certainly apparent in one of his most successful shorts, Valeant Pharmaceuticals International Ltd. (NYSE:VRX). He was able to uncover misleading business practices that Wall Street missed.

As for Left’s take on SHOP stock, he has shown his typical strident approach and has used Twitter Inc (NYSE:TWTR) to get his message out. For the most part, he is concerned that the marketing practices are over-the-top and are violations of FTC (Federal Trade Commission) regulations.

But he also has indicated that the company is not being forthright with the merchant count. After all, SHOP does not provide critical metrics like customer acquisition costs and the churn. Without such information, it can be tough to gauge Shopify’s success.

Even worse, the company’s CEO Tobi Lutke waited for more than a month to respond. And when he did, he dismissed Left’s contentions with little evidence. This is definitely a red flag as Lutke had an opportunity to not only reduce Wall Street worries but also to provide more transparency.

Instead, the cloud over SHOP stock remains, and it seems to be putting a cap on the price.

Something else: Left is not done. He plans to issue another report, although it is not clear when this will happen. In other words, the cloud over Shopify is likely to persist.

Besides, even recent good news has not had much of an impact. The company had a standout Black Friday and Cyber Monday weekend, as the gross merchandise volume (GMV) exceeded $1 billion. About 60% of the transaction came from mobile devices, up 11% on a year-over-year basis.

Some of the keys to the success included partnerships with Facebook Inc’s (NASDAQ:FB) Instagram and eBay Inc (NASDAQ:EBAY), which bolstered the distribution of the merchants. The Black Friday performance also showed Shopify’s depth.

Keep in mind that there was growth in every geography and retail category. But unfortunately, investors did not care much. SHOP stock would go on to fall from $112 to $95.

Bottom Line on the SHOP Stock Price

Another knock on Shopify stock is the valuation. Yes, it is far from cheap, with the shares trading at nose-bleed 16 times sales.

This definitely is an indication that investors see tremendous growth, but it will be tough to maintain the heady rate, which has been about 72% to 75% during the past few quarters. Interestingly enough, SHOP projects revenues for the current quarter at about 57%.

So with the stock priced for perfection, it can be jarring if there is slippage on the top-line. And with Left poised for more action, there could easily be more downside.

Tom Taulli is the author of High-Profit IPO StrategiesAll About Commodities and All About Short SellingFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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