Just when you thought Andrew Left got left behind, another research organization called “Absurd Research” released a bear piece that confirms Left’s points, which investors seemed to have shrugged off.
While Left certainly exacerbated the volatility experienced by Shopify Inc. (TSX:SHOP)(NYSE:SHOP) stock, the concerns over churn and the quality of the company’s subscriber base was mentioned in an article I published last year, well before Left released his short report — a report that many analysts believed was “far-fetched” and lacking in evidence to back up Left’s allegations.
Shopify probably isn’t manipulating its accounting or resorting to fraudulent activities. There’s apparently some slowing growth that I think investors ought to be concerned about. Even strong subscriber growth numbers in the past are the real deal. But one thing that’s bothersome is the vast spectrum when it comes to the quality of Shopify’s subscriber base.
With virtually no switching costs and a flexible month-to-month subscription offering, the quality of Shopify’s subscribers becomes exponentially more important to investors.
If a majority of Shopify’s subscribers are low-quality merchants with “get rich quick” schemes or mediocre-quality merchants that merely dropship counterfeit products from foreign markets, a majority of these merchants are more likely to cancel their subscriptions on a whim if any unforeseen factor shows to disrupt their respective businesses.
I’m really not sure how big a role Facebook Inc. (NASDAQ:FB) and YouTube videos play as a means of marketing for low-quality merchants, but one thing that’s certain is that the existence of such questionable promotional materials probably isn’t adding to Shopify’s base of high-quality subscribers who will be renewing their subscriptions even if times get even tougher.
Further, catering to small-and-medium-sized businesses (SMBs) isn’t attractive for long-term investors anyway. The survival rate for small companies and start-ups is alarmingly low! And in the event of a recession, it’s likely that a majority of these merchants will cancel their subscriptions at the same time, thereby causing Shopify’s subscriber growth to plummet.
At this juncture, the additions outpace the cancellations, but once the tides turn, things could get ugly in a hurry. As one of the few (perhaps only?) Shopify skeptics here at Fool, I’d continue to encourage investors to take profits off the table at the $200+ levels. For those who wish to hold, it may be time to seriously re-evaluate the long-term thesis after having glanced at the bear reports issued by both Citron and Absurd Research.
I believe the recent report issued by Absurd Research isn’t nearly as absurd as Shopify’s over 20 times sales multiple, especially when you consider the astronomically high risks and the low level of visibility into the quality of merchant additions.
Stay hungry. Stay Foolish.
