Shortselling specialist firm Citron Research says that Shopify (SHOP) is in for a big fall after a rapid run leaves it with nowhere else to go.
$SHOP to trade down to $100 next 12 months. Growth story changed the past 30 days. $FB $SQ $MSFT and privacy. Like our NVDA challenge, Citron will donate $200k to Robin Hood Found. if $SHOP higher than today in one year https://t.co/06PUEU0Mtr
— Citron Research (@CitronResearch) April 4, 2019
Shares fell over 3% after the report's release, cutting into the Canadian e-commerce company's 50% gain to kick off 2019.
"I still think they are best in class," Andrew Left, Citron Research's executive editor, acknowledged in an interview with Real Money. "It's just that when you have a PE ratio over 300, its being priced like nothing bad can happen."
He cited the emergence of competition from Square's (SQ) online store, Facebook's (FB) Instagram checkout, and the rumored launch of a Microsoft's (MSFT) shopping competitor, as indicators that could deflate the stock.
"This is a company that is priced for hyper growth. If they lose 15% of their base, their multiple is going to get smacked," Left commented.
His report notes Shopify's run to kick off the year is simply unsustainable amidst these market factors.
"The move of 50% in Shopify' stock price this year despite its below consensus profit guidance can be attributed to the rise in social commerce. However, remember that this guidance was given before the news flow over the past 30 days," Left reasoned in his report. "Just when the business seemed unstoppable, the obvious change in narrative for this market darling will soon cause it to fall victim to the forces of gravity from its stratospheric valuation -- which was based on no competition, no regulatory risk, and flawless execution."
While he applauded the strides the company has made to maintain share growth, especially amid vocal criticism of its "dropshipping" business model, he noted the valuation makes little sense in a broader context of the current market, contrasting the inflated valuation to the much-hyped IPO of Lyft (LYFT) .
"Shopify operates in an increasingly competitive industry that RBC estimates has a total addressable market of $15-$20 billion while Lyft operates in a duopoly where Goldman Sachs projects the industry to grow to $285 billion by 2030," Left noted. "Yet, Lyft trades at an NTM EV/Sales multiple of 6x while Shopify's core subscription solutions business is valued at over 22x when generously assuming that its merchant solutions business should trade in-line with PayPal (PYPL) ."
Left added that the company has been remiss in its duties in data privacy, a pivotal issue in the current market environment. The public divorce from email marketing partner Mailchimp lays out that concern, in his view.
"Mailchimp is a capitalist company and Shopify is a big customer. For them to kick Shopify to the curb, they had to be doing something egregious," Left told Real Money. "Whenever data privacy starts to become an issue, a stock becomes dirty."
He noted that Mailchimp has also recently joined up with Square, the competitor he feels is likely best positioned to take market share from Shopify. Left suggested that Mailchimp could possibly be seeing the same trend ahead.
Left said that Shopify is the next Nvidia (NVDA) , which saw its stock price slump over 40% in the eight months following his bearish call.
To be sure, the call initially looked foolish as Nvidia shares ran over 20% in the immediate six months after the call, allowing investors like the Action Alerts PLUS team to book profits before true euphoria set in.
Considering Left has been criticizing Shopify for 18 months, a time period over which the stock has gained over 100%, there is room for caution on the firm's call.
However, the crypto crash and overall tech market decline in late 2018 ultimately justified his bearish long-term call on Nvidia, despite the nearer term rebuke. Shares of Nvidia have failed to break the $200 level since November.
For Shopify, Left is similarly long-dating his bearish outlook, declaring his firm will donate $200,000 to charity if Shopify's stock holds above current levels in 12 months.
Time will tell if Citron will have some extra spending money - or if it will have to pony up a hefty payment to the Robin Hood Foundation.
History suggests that investors should at the very least take note of the myriad of risks cited.
Shopify representatives did not respond to requests for comment on the Citron report and its criticisms.
(Nvidia, Facebook, and Microsoft are holdings in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells NVDA, FB or MSFT? Learn more now.)
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