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Despite Q3 Beats, Citron Woes Sink Shopify (SHOP) Stock

Shares of Shopify SHOP plummeted on Tuesday morning, even though the e-commerce platform posted third-quarter earnings and revenues beats. This leaves many investors focused on the bold claims made by notable short-seller Citron Research.

Shopify Beats

The Ottawa, Ontario-based e-commerce platform that is geared towards small and mid-size businesses has seen its shares surge more than 155% over the last 52-weeks. On Tuesday, Shopify posted earnings and revenues that topped Wall Street estimates. 

Shopify’s revenues jumped 72% in the third quarter to $171.5 million. The company reported earnings adjusted for stock option expenses of $0.05 per share.

For the fourth quarter, the company now expects to post revenues between $206 million and $208 million. Shopify also projects it will pull in full-year revenues in the range of $656 million to $658 million, which would mark roughly a 70% year-over-year jump.

Despite these solid revenues gains and its adjusted earnings beat, Shopify posted a third-quarter net loss of $9.4 million. For the full-year, the company now expects to post a GAAP operating loss between $12.5 million and $14.5 million.

Shopify’s recent top-line growth has clearly helped the cloud-based business platform company soar in 2017. Still, the company is losing money overall, and now there are also questions about the legality of at least a portion of its business.

Short-Seller

Shares of Shopify began to dip recently, due in part to a push from Citron Research founder Andrew Left.

Citron, and Left specifically, have called Shopify a “get-rich-quick” scheme. In a seven-minute video, Left highlights all of Shopify’s practices that he feels support his case against the company, which he refers to in the same breath as Herbalife HLF—long considered a pyramid scheme and recently entangled with its own Federal Trade Commission suit.

The noted short-seller points out that Shopify’s website boasts that over 2,500 merchants use Shopify Plus. These are businesses that use the company’s platforms to run their e-commerce and even some of their internet-connected brick-and-mortar needs. He then concedes that the company could also have about 20,000 Shopify advanced customers.

Left then points out that the company claims to power over 500,000 online stores worldwide. This sets up his simple question: who are the rest of these 475,000 users and how does Shopify really make its money?

The Citron boss then plants seeds of doubts and suggests that Shopify is profiting from users who sell Shopify services to people saying “you can become a millionaire” by working from home. He goes on to state that Shopify’s website used to have a resignation letter outline and a post about how to make money by promotionally blogging about Shopify’s services.

This is where the pyramid scheme tag might start to carry some water with some investors.

Shopify works with the likes of BuzzFeed, Visa V, Frito-Lay PEP, Canadian Tire CTC, theNew York Times, and celebrities such as Drake and Kanye West.

Now, however, investors seem worried that Shopify and its CEO Tobias Lütke have not done enough to address Citron’s pyramid scheme concerns since the video was released on Oct. 4. Lütke did take to Twitter TWTR on Tuesday morning to post about how many entrepreneurs benefit from the platform.

Every 90 sec an entrepreneur makes their first sale on Shopify. Entrepreneurs and small companies are leading a quiet revolution in commerce

— Tobi Lütke (@tobi)

Yet, some of the first comments are Twitter users asking how many customers quickly stop using Shopify’s platform after joining.

It seems that only time will tell if Citron gets its wish and the FTC takes a look into what it believes are unsavory business practices at Shopify. For now, investors look as if they might shy away from the up and coming e-commerce company until some of these concerns—valid or not—are addressed more completely.

Shares of Shopify tanked over 10% on Tuesday morning after the company posted its relatively solid quarterly earnings.

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Shopify Inc. (SHOP): Free Stock Analysis Report
 
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Herbalife LTD. (HLF): Free Stock Analysis Report
 
Visa Inc. (V): Free Stock Analysis Report
 
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