On Wednesday, Citron Research put out a report calling for Shopify Inc.âs (SHOP, Financial) stock to be cut in half. I do not think it goes far enough considering it is not a totally unique platform and the stock price has been extremely overvalued by the market.
As suggested by my Instagram post, I was already pretty skeptical of the service, but not for the high-pressure multilevel marketing tactics Citron claims. Rather, any company that generates just $300 million in sales and is valued at $11.85 billion should be avoided.
In August, the company blew away revenue estimates for the ninth straight quarter, bringing its year-to-date sales figure up to $509 million. It has been a pretty impressive growth story over the past five years, going from $24 million to over $500 million in that time, yet the company continues to lose money.
The company boasts 500,000 merchants and is priced at $9.4 billion. The industry leader, PayPal (PYPL, Financial), has over 200 million customer accounts, over 400 times more than Shopify, earns over $1.4 billion net and is valued at just 10 times the current market capitalization of Shopify.
Citron points to Herbalife (HLF, Financial) for comparison, but at least Herbalife is profitable. There is at least a case on the long side because of that and the industry it operates in. Yet, on Shopify, if they are booking numbers differently than Square and PayPal while also disregarding the Federal Trade Commission's regulatory guidelines that prohibited Herbalife from âclaiming that members can âquit their jobâ or otherwise enjoy a lavish lifestyleâ upon enrolling in its program, then it has bigger issues than declining stock prices.
Of course, some folks are still promoting the stock as a buy on the dip, citing Citron misrepresented the facts, which may be true. I would strongly caution against that, however, for obvious value investment reasons:
- It is not profitable. More importantly, it does not have a history of profitability and consistency to rely on when making a decision.
- It is not a leader in the industry. It is the hot company people want to talk about, especially since the stock has seen explosive gains in the last year.
- It is extremely overvalued by the market; a $9.6 billion market cap for $500 million in sales and a net loss of $46 million.
Most technology stocks get high multiples, but at 19 times sales the growth rates would need to continue at 100% year over year for the next five years to catch up with PayPal. That is not going to happen in a space this crowded.
Google "payment processors" and you will get countless alternatives to Shopify. Check out the report from Citron here. If you are going to buy the stock, wait for its market cap to fall closer to what PayPal trades at, under seven times revenue, and hope the evidence presented by Citron is not right.
There is very little guru ownership of Shopify with Frank Sands (Trades, Portfolio) holding 3,825,529 shares, approximately 4% of the company, along with Jim Simons (Trades, Portfolio) at 0.3% and Chuck Royce (Trades, Portfolio) at 0.06%.
Disclosure: I am not long/short any stocks mentioned in this article.
