Shopify shares plunge after Citron Research questions business model

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Shopify Inc. shares fell as much as 10 per cent on Wednesday after a video from Citron Research raised questions about the Canadian technology company's business model.

Andrew Left, Citron's managing editor called into question whether Shopify's claim of offering e-commerce solutions to 500,000 small– and medium-sized businesses is little more than a "good old get rich scheme."

Shopify, which provides websites, payments and shipping for online merchants, has been a stock market darling since its trading debut in 2015. In Toronto, the price has risen more than 130 per cent this year alone. The stock also trades on the New York Stock Exchange, where it is one of the year's top performing stocks. The shares fell 10 per cent to $130.69 in Toronto at 12:53 p.m., the most intraday since November.

The success, though, has attracted naysayers who have been betting that the shares have risen too high. As of mid-September, 4.2 million shares had been sold short, representing 5.5 per cent of the company's outstanding shares – an increase of 12.8 per cent.

In his criticism of the company, Mr. Left pointed to various sources, including Shopify web pages, that guide potential customers toward quitting their jobs and becoming entrepreneurs.

"They are not selling to business owners," Mr. Left said in an online video ahead of the release of a report on Shopify. They are selling to people as opportunities to get rich quick."

A spokeswoman for Shopify said the company had no comment on the Citron Research report.

Mr. Left, who's perhaps best known for his unsparing assessments of Valeant Pharmaceuticals International Inc., urged the U.S. Federal Trade Commission to look at Shopify's claims that members can quit their jobs and become millionaires. A post on Shopify's Facebook page says that "2,700 people become millionaires each day," and the company brands itself as "the online store for someday millionaires."

Nutrition company Herbalife agreed to pay $200 million and make sweeping changes to its businesses after the FTC prohibited the company from claiming that "members can 'quit their job' or otherwise enjoy a lavish lifestyle."

Mr. Left also accused Shopify of paying bloggers and influencers to promote the company without disclosing those relationships and said the company "has shown no scalability" over the past few years.

This is not an $11-billion company," Mr. Left said in a video posted to Citron's website. "This needs to get completely looked at by the FTC and completely looked at by Wall Street."

Kevin Krishnaratne, an analyst with Paradigm Capital Inc. said there's no issues with the company's ability to scale profitably. The company beat analysts' revenue estimates for the ninth quarter in a row in the latest earnings report, boosted forecasts for the current quarter and signed up a record number of new merchants.

"They continue to go to the topline and so we still see that profitability coming in 2018," Mr. Krishnaratne said. He is one of 18 analysts who has a buy rating on the stock, along with 12 holds and one sell, according to ratings compiled by Bloomberg.

He also said he doesn't think the majority of Shopify's user base thinks they'll become millionaires. "The company appears to appeal to users that maybe have a day job already and are kind of side-gigging," he said.

Research from McKinsey & Co. suggests that 20 percent to 30 percent of the working age population in the U.S. and Europe engage in independent work or the so-called gig economy, assisted by the rise of digital platforms such as Uber and Airbnb.

These trends are positive for Shopify, Mr. Krishnaratne said in an email. Paradigm Capital doesn't own the stock.