Shopify Inc.’s strong third-quarter earnings report and the CEO’s defence against “preposterous claims” by a “short-selling troll” did little to ease investor concerns as shares tumbled more than eight per cent.
The company posted its first adjusted operating profit as a public company in the quarter ended Sept. 30 — a quarter earlier than anticipated — and CEO Tobias Lutke publicly addressed allegations made earlier this month by high-profile short-seller Andrew Left of Citron Research that sent shares falling on the Toronto and New York stock exchanges.
Despite this, the company’s shares slipped by more than 8.5 per cent to close at $128.26 on the Toronto Stock Exchange on Tuesday.
Lutke attempted to ease concerns on a call with analysts during which he had promised to address Left’s criticism of the company’s business model in a video published earlier this month.
“This is going to be a fun one,” Lutke said at the start of the call, explaining the company waited this long to address the allegations because it does not engage in short-term stock management and reserves this time each quarter for such activities.
On Oct. 4, Left published a video alleging the company, which provides businesses with online checkout services, doesn’t comply with Federal Trade Commission guidelines and suggesting the stock’s value is closer to $60 US before any potential FTC involvement.
He compared the company’s practices, which he called a “good ol’ get-rich-quick scheme,” to Herbalife. Left alleged Shopify’s partners recruit merchants by wooing them with promises of self-employment and million-dollar incomes.
During the call, the CEO asserted the company sells an e-commerce platform — not business opportunities.
Shopify complies with FTC regulations, Lutke said, and much of their content shows how hard — rather than easy — entrepreneurship is.
“Implying that these businesses are somehow illegitimate is an insult to their hard work,” he said.
The company makes most of its revenue from merchants successfully selling through their online shops, he added.
Every 90 sec an entrepreneur makes their first sale on Shopify. Entrepreneurs and small companies are leading a quiet revolution in commerce
Harley Finkelstein, the company’s chief operating officer, said Shopify has a team that approves individual affiliate partners who sign an agreement outlining their disclosure responsibilities.
“Those that don’t comply we simply kick out of the program.” He said some of the alleged affiliates Left’s report alluded to are not partnered with Shopify.
Lutke said Shopify consulted with outside legal counsel, who also believe the claims are unsubstantiated, and has not been contacted by the FTC.
Citron Research responded Tuesday, saying 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,” Citron said.
“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.”
Shares in Shopify came under pressure after Left published his initial criticism, falling more than 10 per cent on the TSE the day Left published his report. The shares have since regained some of the ground they lost, but continued to drop Tuesday.
The company, which keeps its books in U.S. dollars, said it lost $9.4 million in its third quarter as its revenue grew 72 per cent compared with the same period last year.
Its loss for the quarter amounted to nine cents per share compared with a loss of $9.1 million, or 11 cents per share, a year ago when it had fewer shares outstanding.
On an adjusted basis, Shopify said it earned $5 million, or five cents per share, for the quarter, compared with an adjusted loss of $1.8 million, or two cents per share, for the third quarter of 2016.
Revenue totalled $171.5 million, up from $99.6 million.
The increase came as its subscription solutions revenue grew to $82.4 million US compared with $49.8 million US a year ago, while merchant solutions revenue climbed to $89 million US, up from $49.7 million US.