Shopify shares plunge as short-seller slams Company as a ‘get-rich-quick scheme’

Shares in Canadian software company Shopify Inc. plunged following a U.S. research firm assaulted its business model and maintained that its advertising techniques must be investigated by American authorities.

The stock closed down 11.5 percent in heavy trading, cutting $1.4-billion off its market value, after Beverly Hills, Calif.-based Citron Research alleged Shopify’s company was “dirtier than Herbalife” and stated that the Ottawa-based firm had “mastered the excellent ol’ get-rich-quick scheme.” Herbalife is a multilevel marketing company that sells weight-loss and nutritional goods, which agreed to pay $200-million (U.S.) in a settlement with the U.S. Federal Trade Commission (FTC) after being accused of pyramid-scheme practices.

In a note on the Citron site, managing editor Andrew left — who’s been known as the “the shock jock of short -vendors” for his incendiary attacks on publicly traded companies whose shares he’s shorted — praised Shopify’s technology, which enables retailers to install and operate online shops over the net. However he said Shopify’s “dirty little secret” is an affiliate marketing program which enables third party promoters to make commissions for persuading new retailer clients to sign up.

Affiliate marketing is a frequent online selling practice, providing individuals and companies a cut of cash made from online purchases whenever they have helped direct the purchaser to that item, typically through blogs or reviews. Some affiliate marketers are mainstream actors or social-media personalities and based businesses also use the clinic, including Amazon. Last year, the New York Times Co.. Review websites the Wirecutter and the Sweethome for over $30-million.

However, the practice has attracted recent scrutiny from the FTC, which warned in a blog post last month that lots of such entrepreneurs put out “exaggerated claims or misleading information to get people to click. They may say anything to get you to click on their advertisement because they have an incentive — getting paid{}”

Shopify’s affiliate marketers earn the equivalent of their first two weeks of a brand new client’s monthly fee when the merchant begins using the platform. Fees begins at $29 per month for a basic package. Shopify said lately that 13,000 affiliate partners referred merchants to the business in the last year, representing the business’s third strongest customer acquisition station, behind organic traffic and paid advertising.

Mr. Left, whose notice was long on accusations but short on detail, also alleged that Shopify improperly promotes the belief that its retailers can become millionaires, that third party affiliates don’t disclose they’re paid by Shopify and that the majority of Shopify’s customers aren’t true retailers but “people that are purchasing a system” to earn money online. He contended those and other clinics would confront FTC scrutiny.

A spokeswoman for Shopify declined to comment, as did a spokesman for the FTC.

Some analysts steered clear of addressing the FTC concerns and seemed unpersuaded by Citron’s accusations. Paradigm Capital’s Kevin Krishnaratne occurred with Mr. Left’s assertion Shopify was not a “scaleable” company, noting its losses have been narrowing since it adds clients.

But, one Citron assertion that seemed to resonate from the marketplace was Mr. Left’s claim that Shopify inventory was worth only $60, just more than half of its closing price on the New York Stock Exchange the preceding day. Shopify has been a leading performer on both the Toronto Stock Exchange and the NYSE, almost tripling in value in the last year, but some investors seem to think the stock is currently overvalued.

As of mid-September, 4.2 million shares were sold short, representing 5.5 percent of outstanding shares — an increase of 12.8 percent. Mr. Krishnaratne stated “you can make the argument its pricey” given it trades at about a 60-per-cent premium to other subscription-software businesses. TheStreet.com’s Chimed in, saying following the stock’s strong run this year, “perhaps you need to Sell-ify.”

Mr. Left has made a name for himself targeting publicly traded companies he accused of participating in deceptive tactics, being overvalued or both. His best-known goal was Valeant Pharmaceuticals International Inc., which he compared to Enron Corp. in 2015 before its rapid descent.

He’s also gone after other pharma and technology stocks such as Tesla, Nvidia, Go Pro and Express Scripts. In a brief interview with the Globe and Mail, Mr. Left said he had “very substantial certainty” about his assertions on Shopify.

With files from Susan Krashinsky Robertson

Courtesy: The Globe And Mail

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