The Motley Fool

Should You Second-Guess Your Investment in Shopify Inc.?

Last month, I encouraged investors to take advantage of fear and buy the dip. If you had, you would be up a few percent. And in January, I suggested that this company might be Canada’s top tech stock. If you had bought it then, your shares would have increased by nearly $70 — an increase of 120%.

I’m talking about Shopify Inc. (TSX:SHOP)(NYSE:SHOP), and the past couple of months have made investors second-guess their investment in the company. But should they? Or are these fears short term, and this investment remains one of the best opportunities on the market?

Let’s dive into what’s causing these fears.

Up first is the report that Citron Research put out questioning the legality of some of Shopify’s marketing tactics — more specifically, Shopify was accused of promoting a “get-rich-quick scheme.” It’s true that Shopify runs an affiliate program that encourages users to open stores, but this is not inherently illegal. Many companies offer rewards to those that promote the company. And having done affiliate marketing myself, I don’t think what Shopify is doing is illegal.

Citron can put out great research, but because they are short sellers, they want companies to do poorly. Therefore, if Citron can find reason to believe the shares should be worth less, a report can send shares lower. However, because of Citron’s need for the company to drop, they’re biased. I seriously question Citron’s argument about Shopify’s marketing tactics.

Another reason that investors are potentially worried is that operating expenses as a percentage of revenue increased to 65.7% from 63.5% in the year prior. No one likes to see costs go up, especially when you’re talking about a company that is not generating profit.

Shopify is very much in building mode. It’s looking to gobble up as much market share as it possibly can, because it knows there are other providers out there. Like many rapidly growing companies, profit is an afterthought, and I’m okay with that for the time being.

Currently, Shopify is only targeting a market comprised of 10 million small- to medium-sized business with a $10 billion total addressable market. And it is doing well there. However, the global market is 46 million SMBs with a $46 billion market. Once Shopify truly reaches scale, I expect the operating expenses as a percentage of revenue will drop, as those costs are spread out over many more clients.

On one hand, Shopify is expensive as a stock, and its costs are high, cutting into potential profits quite significantly. On the other hand, Shopify has been making smart partnerships with many of the largest e-commerce players, its gross merchandise volume continues to rise, and we’re about the enter the busiest season for shopping.

Do I think you should second-guess Shopify? No. I think Shopify still has tremendous potential. Could it pull back more, though? That I can’t tell, so you can either wait on the sidelines or start buying the dip.

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Tom Gardner owns shares of Shopify. The Motley Fool owns shares of Shopify and SHOPIFY INC. Shopify is a recommendation of Stock Advisor Canada.

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