Shopify shares tumble on earnings forecast, short seller claims


Shopify CEO Tobi Lütke

Julie Oliver / Postmedia

Shopify’s share price sagged at much as 13 per cent in early morning trading Tuesday following the company’s posting of third-quarter financial results.  It finished the day at $128.26 on the TSX, down 8.5 per cent.

Why such a steep decline? After all, the seller of e-commerce technology on Tuesday published better-than-expected revenues of $171.5 million (all figures U.S.) for the quarter ended Sept. 30 — well in excess of badysts’ projections of $166 million.

The continuing presence of Citron Research managing editor Andrew Left almost certainly had much to do with the share price weakness.

But a company forecast of slowing revenue momentum combined with continuing losses also factored in.

Left, who makes money targeting companies he believes are over-valued, alleged early last month that misleading marketing is the catalyst behind Shopify’s recent jump in revenues and market value. Shopify’s share price slumped 20 per cent over the following days and has yet to recover to the $145.70 close the night before Left issued his report.

At several points during the Tuesday conference call, badysts called upon Shopify executives to defend themselves.

In response to Left’s claim that third-party affiliates exaggerate how easy it is to set up a business on Shopify, chief executive Tobias Lütke noted: “Most of our (web) content is about how hard entrepreneurialism is.”

Lütke characterized as “preposterous” Left’s general allegation that Shopify’s marketing practices are “dodgy”.

Shopify’s chief operating officer Harley Finkelstein noted the vetting done on affiliates, who get paid for referring would-be entrepreneurs to Shopify’s e-commerce platform.

“There’s a fairly strict process,” he noted, adding that affiliates who don’t conform to Shopify’s terms and securities regulations “are kicked out”.

Lütke confirmed that his company had received no calls for information from oversight from U.S. consumer or securities watchdogs.

It’s been a frustrating period for Shopify’s executives who would prefer that attention focus on the company’s core business and technology, which even Left acknowledged Tuesday “is effective for small and medium-sized businesses to launch e-commerce platforms”.

However, Left published a note saying he was “unimpressed” with Shopify’s defence of its marketing regime. Left said outside investors can’t understand Shopify’s underlying business without more detailed data on the firm’s 500,000 plus online merchants — how many leave or go bust each quarter, for instance.

While Left offered few details of his own, Shopify would prefer to keep proprietary information about its customer base in-house. Lütke defended his reticence in part by noting, “The best companies don’t engage in short-term stock price management.”

Will that be enough to satisfy investors? Tom Forte, the New York-based senior research badyst for investment firm D.A. Davidson & Co., said Shopify did a “brilliant” job Tuesday explaining how its marketing is in compliance with regulations and “best practices.”

However, he added,” The more disclosure the better.” 

Forte suggested Shopify should give investors a much clearer snapshot of its base of merchants, perhaps dividing them into small and large categories if it’s concerned about giving away too much information to competitors.

There seems little question investors are a little uneasy about the ongoing deficits.

Shopify lost nine cents per share in the third quarter compared with 11 cents per share during the same period a year earlier. The Ottawa firm has been pretty consistent in telling everyone it intends to invest heavily in both its technology and marketing. Shopify said it expects to post a fourth-quarter operating loss of between $12.5 and $14.5 million — a likely decline from the third quarter deficit of $12.7 million.

“Our focus is not on profitability,” company chief financial officer Russ Jones said. “It’s very much on growth.”

But even revenues are experiencing slowing momentum. Shopify said it expects fourth quarter revenues should total between $206 million and $208 million. If they do, that would represent year-over-year growth of less than 60 per cent.

Pretty good by most standards, but not when you’ve just done considerably better in the quarter just finished. And not when your stock is trading at a sky-high multiple of more than 15 times revenues per share.

Assuming Shopify’s growth continues somewhere close to its recent pace, its revenues will eventually be large enough to bring that multiple down to more conservative levels. But meantime, the company is vulnerable to attacks from short sellers, whether truly informed or not.


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