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Why Shopify's Shares Tumbled 14% in October

What happened

Shares of Shopify (NYSE: SHOP) fell by 14.6% last month, according to data provided by S&P Global Market Intelligence, after the company got slammed by a Citron Research report by short-seller Andrew Left. 

So what

Citron Research released a scathing report against Shopify at the beginning of October accusing the company of not properly reporting the compensation it pays to its 13,000 "partners," which are affiliates paid to promote Shopify's platform. Citron says that some of these partners are violating Federal Trade Commission (FTC) laws by overpromising how successful businesses will be when they use Shopify's online platform. 

Citron also questions Shopify's addressable market and how it reports its customer numbers. "Out of the claimed 500,000 websites, Shopify has about 2,500 "Plus" clients and maybe another 20,000 "Advanced." So where are the other 450,000 + websites????" the report said.

Image source: Shopify.

Citron believes the FTC needs to investigate Shopify and that scared investors, which then pushed the share price down.

Shopify's stock slid again at the end of the month after the company reported its third-quarter results. Shopify actually had a strong third quarter -- with its top line increasing by 72% year over year, but investors may have been paying closer attention to Citron's response to Shopify's results.

As Citron wrote in a blog post:

Citron understands Shopify's platform is effective for small and medium sized businesses to launch e-commerce platforms. We never doubted they have good software for accomplishing this task.

That being said, we were unimpressed by the company's response to Citron's conclusion that Shopify sells business opportunities through affiliate marketers, and they depend on affiliate marketing to drive their growth metrics.

Shopify CEO Tobi Lutke addressed the Citron concerns saying, "We vigorously defend our business model and stand resolutely behind our mission and the success of our merchants."

Now what

Shopify investors should continue to keep tabs on any news that would give credence to Citron's claims, but Shopify has fought the idea that it's playing fast and loose with its customer numbers, and so far, there doesn't appear to be any reason to believe Shopify's management isn't being honest. Shopify may need to address how it vets its affiliate partners again so it can ease investor concerns, but there's no indication that any problems it may be having right now are widespread.

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Chris Neiger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Shopify. The Motley Fool has a disclosure policy.