Shopify Inc. (NYSE: SHOP) has been one of the most exciting stocks on the market since its debut in 2015. Shares of the e-commerce management specialist have jumped 286% since its IPO, powered by revenue that has grown by 72% or more in each quarter. With results like that, it's easy to see why it's one of the most talked-about stocks today. Not only is the company putting up extraordinary growth and delivering huge returns, but its leadership in its e-commerce niche positions it for long-term dominance as online retail, which still only makes up 9% of U.S. retail sales, gradually replaces more of the brick-and-mortar variety. Many investors compare Shopify to Amazon.com, the e-commerce giant that just put up 34% sales growth on $43.7 billion in revenue.
Of course, like most companies that engender such enthusiasm, Shopify trades at a premium valuation. The company is still not profitable, but its shares fetch a whopping 17.6 price/sales ratio, a level usually reserved for unproven biotechs and start-up tech companies.
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The debate over Shopify got more interesting recently when Citron Research's Andrew Left said he was shorting it, likening it to a pyramid scheme, and accusing it of inflating the number of customers it had through aggressive marketing tactics. Shopify shares fell 20% in the following days.
With that background in mind, let's take a closer look at Shopify's prospects and see if the stock is a buy today.
A huge opportunity
Shopify is the leading provider of cloud-based, multichannel and e-commerce platforms for small and medium-size businesses (SMBs). Its software allows merchants to get a single view of their businesses and customers across all sales channels, helping them manage their operations by doing things like tracking inventory and opportunity.
With its focus on SMB's, Shopify now has more than 500,000 customers, and that figure has grown annually by 74% since 2012. Its subscription model ensures that each customer acts as a continuing revenue stream as long as they stay on the platform, and since switching to a rival provider is an expensive effort, retention rates are believed to be high. Shopify has said its retention rates are higher for larger companies that use higher-priced plans.
The company intends to grow by expanding its base of merchants, helping merchants boost revenues, and by innovating and expanding its platform. As more businesses look to e-commerce for growth, Shopify will grow with them, and its growth rate is a testament to the popularity of the platform. With just 9% of the United States' $4 trillion in annual retail sales happening online, there's an enormous growth opportunity for e-commerce specialists.
The company's profitability is also improving; gross profit has outgrown revenue this year, and it reported its first adjusted profit in the third quarter with an adjusted EPS of $0.05. That's a sign that the company's efforts to build scale are gradually paying off, and it should become more profitable over the coming quarters.
The bear case
Not only did Shopify shares sink 20% after Left presented his short-selling thesis, they fell 9% after the company reported third-quarter earnings, despite beating estimates on both top and bottom lines and raising its guidance. Investors still seemed to be rattled by Left's accusations, and were disappointed that management did not provide further details to counter them. CEO Tobi Lutke simply said that the company's legal advisors considered the claims preposterous, and noted that his company had not been contacted by the Federal Trade Commission.
Lutke had previously called Left a "troll," and promised to respond to him in the earnings call, but the company did not release any new data or metrics. Left's case rests on the idea that most of Shopify's customers are aggressively recruited, and will quit the platform once their businesses fail. He has presented information to the Federal Trade Commission, and called for the company to release its churn rate -- i.e., the number of subscribers who leave the platform each quarter. The stock's valuation also makes it vulnerable, and while it's trading in the neighborhood of $96, Left has slapped a $60 price target on it.
What's the verdict?
With its high valuation and high growth on the one hand, and Left's short-seller case on the other, it's clear that Shopify stock will continue to be volatile. Bulls should keep in mind that while it's in Left's interest to exaggerate his case -- the more he can push the stock price down, the more he'll profit -- that doesn't mean that his argument doesn't have merit.
That makes Shopify a high-risk play, but the company's growth rate and its opportunity in e-commerce give it a lot of upside potential. With its P/S valuation already stretched to 17, the stock is probably due for a breather so it can grow into its $10 billion valuation and move toward profitability.
Still, for risk-tolerant investors, the growth potential for Shopify may be good to pass up. For that type of an investor, I'd consider Shopify a buy, but others may want to stay away, as the stock could plunge if Left has any luck in persuading the FTC that there's merit in his accusations.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jeremy Bowman owns shares of Shopify. The Motley Fool owns shares of and recommends Amazon and Shopify. The Motley Fool has a disclosure policy.