Shopify Inc. (TSX: SHOP)(NYSE:SHOP) critics have a lot to talk about these days. Shares of the cloud-based e-commerce platform have lost nearly 17% in just the past five days, as of this writing. That means Shopify has lost almost a quarter of its value so far this year, and if some short sellers are to be believed, the stock could head even lower.
Ouch.
There’s another school of thought that believes every dip in Shopify shares is an opportunity for growth investors.
Which side should you be on today? The answer could lie in the reasons why Shopify is falling.
The stunning rise
Shopify has been on a meteoric rise. Until the middle of this month, Shopify had more than doubled in just about a year’s time when the S&P/TSX barely budged. So, some correction was warranted and inevitable — that’s how the stock markets work. The only thing is that you cannot predict the timing of the correction.
The last time Shopify lost substantial value within a matter of days was in October 2017. Funnily enough, the company was growing its merchant base and top line aggressively both times. It was one individual that triggered panic both times.
Taking stock of the last six months
Short seller Citron Research’s Andrew Left released a scathing negative report in October, calling Shopify a “get-rich-quick” scheme and claiming that the company is flouting Federal Trade Commission regulations.
Shopify shares fell but soon recovered to hit new highs over the months before Citron released yet another Shopify bashing report earlier this week. In between, Shopify released two quarterly reports, including fiscal 2017 earnings report.
In FY 2017, Shopify’s revenue surged 73% to US$673.3 million, with subscription solutions and merchant solutions revenues growing 64% and 81%, respectively. While the former suggests that merchants are renewing their subscriptions with Shopify, the latter points at growing gross merchandise volume (GMV), or the total dollar value of transactions conducted on the platform.
Shopify ended FY 2017 with more than 600,000 merchants and record GMV of US$26.3 billion.
FY 2017 was also a significant year in terms of growth. Shopify added selling venues like eBay and Instagram for its merchants, launched its own chip and swipe card reader, added shopping partners like DHL and United Parcel Service, and expanded its global footprint.
On the flip side, Shopify’s net loss climbed roughly 13% to US$40 million in FY 2017, as the company continued to spend money on sales, marketing, and research and development. Liquidity isn’t a concern though, as Shopify still ended the year with US$938 million in cash, cash equivalents, and marketable securities.
Left, however, isn’t impressed.
Why Shopify shares are tumbling
In his latest report, Left stressed how Shopify’s growth engine could “come to an abrupt halt,” as Facebook Inc. (NASDAQ:FB) is compelled to revise its privacy guidelines in the wake of the recent data breach fiasco.
There’s some merit there, as Facebook is a big advertising platform for merchants, especially the small- and medium-sized ones that Shopify caters to, to build and grow their businesses. So, any restrictions on Facebook on data access, advertising, etc. could deter merchants.
Here’s what you should do with Shopify now
Investors need to keep an eye on two things: net additions in the merchant count and top-line growth.
Frankly, I don’t expect Shopify to be profitable for at least the next couple of years, as expenditures like marketing and stock-based compensation should remain high. Right now, Shopify’s prospects depend largely on its sales, as with any other early-stage growth company. I like Shopify’s efforts to expand its business and focus on technology and would consider buying shares on the dip.
Finally, I’m going to leave you with something to think about. Here’s one of Shopify’s CEO Tobi Lütke’s tweets in response to Left’s latest report: “Our 600,000+ entrepreneurs can sell on any channel they want to. If their customers want to buy via carrier pigeon, we’ll build a channel for that too. The health of any individual channel has little effect on the overall platform. Demand migrates.”
