Why Shopify Inc. Stock Dropped Today

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What happened

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Shares of Shopify Inc. (NYSE: SHOP) fell 11.6% on Wednesday after short-seller Citron Research released a new report describing the e-commerce platform specialist as a "get-rich-quick" scheme that runs afoul of Federal Trade Commission regulations. 

With the caveat that Shopify's platform is arguably "the best build-your own e-commerce software on the market," Citron founder Andrew Left likened Shopify and its affiliate program to Herbalife, which last year was required to pay a $200 million settlement with the Federal Trade Commission for misrepresenting the earnings potential of its own distributors.

So what

Left urged the FTC to more closely examine Shopify's claims that its merchants can become millionaires and quit their jobs, and further accused Shopify of paying its over 13,000 "partners" -- or people who promote the platform and refer merchants to Shopify -- without requiring or enforcing appropriate disclosures of that compensation.

Left also argued that Shopify doesn't deserve its lofty valuation trading at nearly 17 times sales just prior to the report, but rather should be valued closer to 8.5 times sales similar to other leading SaaS companies like Square or Wix. Thus, he suggested the stock should sit 45% lower than it stood yesterday, before warning that's "before the company is caught by the FTC."

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Now what

I have a feeling that, similar to the response to Citron's other short reports in recent weeks, a number of analysts will likely step out to defend the company in the coming days. But despite Citron employing its usual sensationalistic tone, these are serious allegations that merit a detailed rebuke by Shopify management. With shares still up 140% over the past year as of this writing, it's no surprise to see Shopify stock pulling back hard today.

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Steve Symington has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Shopify. The Motley Fool has a disclosure policy.