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A U.S. short-seller's allegations against Shopify Inc. continued to roil the e-commerce software company's stock on Thursday, even as a number of analysts jumped to its defence.

The Ottawa-based company's share price fell more than 9 per cent in early trading, on top of an 11.5-per-cent drop on Wednesday, after Citron Research argued the company's business practices should be investigated by U.S. regulators and its stock was wildly overvalued. After bouncing back in the afternoon, Shopify closed at $126.19 in Toronto, down 2.1 per cent, but it has lost nearly $1.7-billion in market value since Tuesday.

In a video and report, Citron founder Andrew Left challenged the validity of parts of Shopify's business model and marketing practices and called into question the quality of its base of 500,000 customers – arguing that as many as 450,000 of them may sell "crap" and are likely to disappear very quickly.

"What [Shopify] is showing in growth is not real growth," he said in an interview with The Globe and Mail. "These are not real merchants."

In his report, he likened the company's business model to a get-rich-quick scheme, in which the company sells prospective clients on the promise of earning a fortune through e-commerce sales.

In response to Citron's report, Shopify released a brief statement on its website Thursday morning, stating that 131 million consumers have purchased something in the past 12 months on a site that uses Shopify software.

"Shopify has always strived to take the path that leads to more entrepreneurs by designing its platform to remove the technical, operational, and financial barriers to enable anyone, anywhere, to build, grow, and scale a business," the company said. "We vigorously defend our business model and stand resolutely behind our mission and the success of our merchants." A Shopify spokesperson declined to answer questions.

Shopify said in early August that its customer count had surpassed 500,000 after rising at an average annual clip of 74 per cent since 2012.

Mr. Left, a short-seller known for incendiary attacks on companies such as Valeant Pharmaceuticals International Inc., acknowledges that Shopify offers a "good ecosystem" for companies and individuals to build e-commerce software, which enables merchants to set up and run online stores over the Internet.

Where Citron takes issue, though, is with the company's affiliate marketing program, calling it a "dirty little secret" that allows third-party promoters to earn commissions for persuading new merchant customers to sign up.

Shopify rewards these affiliates as much as $2,000 for each new merchant referral, and Mr. Left has said he believes these incentives may cut into the company's own financial performance.

"We're concerned about the quality of the accounts," Mr. Left said in the interview. "Why is this company with all this growth not making money?"

In its fiscal second-quarter results, ended June 30, Shopify reported a net loss of $14-million, compared with a loss of $8.4-million in the second quarter of 2016. However, revenues rose to $151.7-million, up 75 per cent from last year.

Affiliate marketing is a common online selling practice, giving individuals and businesses a cut of money made from online purchases if they've helped direct the buyer to that product.

Shopify offers its 13,000 affiliate partners the equivalent of the first two months of a new customer's monthly fee once new merchants they refer sign on to its platform. Customers pay monthly subscription fees starting at $29 to use Shopify's cloud-based software.

However, affiliate marketing has caught the attention of the U.S. Federal Trade Commission (FTC), which has warned that such marketers may put out "exaggerated claims or misleading information to get people to click."

Mr. Left believes Shopify could garner the scrutiny of the FTC.

Citron also drew comparisons between Shopify and Herbalife International Inc., a multilevel marketing company that sells nutritional and weight-loss products. After falling into the crosshairs of short-sellers, who argued that the company was a pyramid scheme, Herbalife agreed to pay a $200-million settlement with the FTC last year.

Though Herbalife's share price was hit hard by the initial claims of short-sellers, it has since recovered most of the lost ground and is up more than 40 per cent this year.

The Citron report on Shopify follows extraordinary gains in Shopify's share price. The shares made their trading debut in 2015 at $17, and rallied as high as $124 in New York recently – a sevenfold increase that has made it one of the hottest stocks in Canada and the United States.

However, the gains also raise concerns about the stock's stretched valuation relative to sales, and may make the share price sensitive to bad news.

"As much as we think the issues brought up are remote, when it comes to creating any potential for a regulatory scrutiny or potential change in the way Shopify operates, we can't ignore the fact that it surfaces short-term volatility given the robust valuation," Richard Tse, an analyst at National Bank Financial, said in a note.

He added: "That said, with no change in our outlook, we think long-term investors should see the short-term volatility as an opening."

Similarly, Gus Papageorgiou, an analyst at Macquarie Capital Markets, argued that the downturn is a buying opportunity.

"Before Shopify, if a [small or medium-sized business] or entrepreneur wanted to develop an e-commerce site, it would take months of planning and could cost over $75,000. Today, and thanks to Shopify, it can be done in under a day and cost $29/month," the analyst said in a report.

"What Shopify has done is substantially remove the barriers to online commerce. That is the key reason the company has been so successful," he said.

With a report from Sean Silcoff

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