You wouldn’t know it by looking at the charts, but Shopify Inc (NYSE:SHOP) stock is a hotly-debated topic. On one hand, we’re witnessing incredible technical momentum. Year to date, Shopify stock is up a blistering 151%. On the other hand, despite positives like strong earnings, questions have been raised about Shopify’s business practices.
If you’ve read the news in recent years, you know that major brick-and-mortar retailers face a fork in the road. The survivors have embraced the e-commerce revolution, while others have been run over by it. What makes SHOP stock so appealing as an investment is that the company gives small businesses a platform to compete against the big boys.
As illustrated in the most recent Shopify earnings report, the company’s GMV (gross merchandise volume) growth of 69% is astounding. It highlights, among many things, Shopify’s undeniable appeal to small businesses and disruptors. InvestorPlace contributor Chris Lau notes that management “is hiring more staff to support its business expansion.”
Lau also references the platform’s ease of use, which makes it superior to the Amazon.com, Inc. (NASDAQ:AMZN) or eBay Inc (NASDAQ:EBAY) shop fronts. Needless to say, that’s a major plus for Shopify stock.
But just how much should we buy into the hype? If, for instance, some of the outstanding figures advertised in recent Shopify earnings reports were fudged, investors would think differently. While no one’s accusing the company of outright fraud, a lack of transparency from the top hinders upside momentum.
Warm and Fuzzy Feeling From Shopify Earnings Questioned
By now, affected parties have had time to absorb Citron Research’s Andrew Left’s bearish call on Shopify stock. As our own Tom Taulli reminds us, Left puts the “research” into Citron Research. He successfully shorted Valeant Pharmaceuticals International Ltd. (NYSE:VRX) when he uncovered misleading business practices that other analysts missed.
Now, SHOP stock is on Left’s radar. Taulli explains:
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.
Accusations are one thing — anybody can make them. However, two things immediately struck my mind about this particular drama involving Shopify stock. First, the accuser leverages significant clout and credibility. Second, and more worrisome, the accused offered only a feeble defense, if you can call it that.
Shopify CEO Tobi Lutke took more than a month to address the issue. When he did, the head exec offered no substantive counterarguments. Investors regarded the lack of forthrightness as concerning, a point that both Taulli and Lau agree on.
Our feature writer James Brumley weighed in, stating that SHOP stock appears to have formed a head-and-shoulders formation. Whether you follow the technical approach or not, the head-and-shoulders pattern has earned a solid reputation of being a reliable harbinger of a bullish-to-bearish trend reversal. Given the backdrop, diving into Shopify seems unwise.
Big Bulls Love Shopify Stock
Of course, we always have the other side of the story. Another one of our contributors, Bret Kenwell, believes that what we’re seeing instead is akin to a bullish pennant formation. In this setup, Shopify stock is building support from a rising baseline. On the opposite end, a resistance ceiling has formed, capping SHOP’s upswings at lower and lower levels.
At the apex point, the long-term bulls and bears collide. What happens next is most likely going to be a breakout, or a breakdown. Kenwell bets that if support holds, SHOP stock could quickly jump back to $125.
What’s fascinating here is that we have two analysts that have done their homework. One sees SHOP stock moving higher, the other in the opposite direction. Do we have a tie-breaker?
That’s the role Will Ashworth might play for many potential buyers sitting on the fence. Like everyone else on Wall Street, Ashworth was taken aback by Left’s accusations. However, what didn’t receive as much media attention were the key players bolstering Shopify stock during the recent correction.
Ashworth reminded us that Coatue Management LLC‘s Philippe Laffont took the Left drama as an opportunity to load up.
Boy, did he ever!
Ashworth wrote:
On Oct. 24, Coatue Management became the second-largest owner of Shopify Class A subordinate voting shares at 8.2% of the company, or a little more than seven million shares, up from 2.6 million shares at the end of September.
If a major player is willing to take a shot on Shopify stock, shouldn’t you?
Transparency Is King
I have to say that both the bull and bear arguments are compelling. Perhaps this level field represents the core reason why SHOP stock refuses to tip its hand too early.
But in consideration of all factors, I ultimately want the ability to perform my own deep-seated research. Unfortunately, just looking at the chart or reviewing the Shopify earnings report doesn’t allow me to do that.
As Taulli mentioned, the churn rate is critical in determining the true context of Shopify’s numbers. Ordinarily, we could take management’s word for it. However, we have a serious accusation leveled. At minimum, we should have the relevant facts to form our own opinion.
That we are denied this information makes me queasy about SHOP stock.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
