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Workers sit at their desks in the Shopify Inc. offices in Toronto, Ontario, Canada, on Wednesday, Nov. 11, 2015.Kevin Van Paassen/Bloomberg

Shares in Canadian software firm Shopify Inc. plunged after a U.S. research firm attacked its business model and claimed that its marketing practices should be investigated by American regulators.

The stock closed down 11.5 per cent in heavy trading, cutting $1.4-billion off its market value, after Beverly Hills, Calif.-based Citron Research alleged Shopify's business was "dirtier than Herbalife" and said the Ottawa-based company had "mastered the good ol' get-rich-quick scheme." Herbalife is a multilevel marketing company that sells nutritional and weight-loss products, and which agreed to pay $200-million (U.S.) in a settlement with the U.S. Federal Trade Commission (FTC) after being accused of pyramid-scheme practices.

In a note on the Citron website, managing editor Andrew Left – who has been called the "the shock jock of short -sellers" because of his incendiary attacks on publicly traded companies whose stocks he has shorted – commended Shopify's technology, which enables merchants to set up and run online stores over the Internet. But he said Shopify's "dirty little secret" is an affiliate marketing program that allows third-party promoters to earn commissions for persuading new merchant customers to sign up.

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, typically through reviews or blogs. Some affiliate marketers are mainstream celebrities or social-media personalities and established companies also use the practice, including Amazon. Last year, the New York Times Co. acquired review sites the Wirecutter and the Sweethome for more than $30-million.

However, the practice has drawn recent scrutiny from the FTC, which warned in a blog post last month that many such marketers put out "exaggerated claims or misleading information to get people to click. They may say anything to get you to click on their ad because they have an incentive – getting paid."

Shopify's affiliate marketers earn the equivalent of the first two months of a new customer's monthly fee once the merchant starts using the platform. Fees starts at $29 a month for a basic package. Shopify said recently that 13,000 affiliate partners referred merchants to the company in the past year, representing the company's third strongest customer acquisition channel, behind organic traffic and paid marketing.

Mr. Left, whose note was long on accusations but short on detail, also alleged that Shopify improperly promotes the notion that its merchants can become millionaires, that third-party affiliates do not disclose they are compensated by Shopify and that most of Shopify's customers are not true merchants but "people who are buying a system" to make money online. He argued those and other practices would face FTC scrutiny.

A spokeswoman for Shopify declined to comment, as did a spokesman for the FTC.

Some analysts steered clear of addressing the FTC concerns and seemed unpersuaded by Citron's accusations. Paradigm Capital's Kevin Krishnaratne took issue with Mr. Left's assertion Shopify wasn't a "scaleable" company, noting its losses have been narrowing as it adds customers.

However, one Citron assertion that seemed to resonate in the market was Mr. Left's claim that Shopify stock was worth just $60, just more than half its closing price on the New York Stock Exchange the previous day. Shopify has been a top performer on both the Toronto Stock Exchange and the NYSE, nearly tripling in value in the past year, but some investors appear to believe the stock is now overvalued.

As of mid-September, 4.2 million shares had been sold short, representing 5.5 per cent of outstanding shares – an increase of 12.8 per cent. Mr. Krishnaratne said "you can make the argument its expensive" given it trades at about a 60-per-cent premium to other subscription-software companies.'s Jim Cramer chimed in, saying after the stock's strong run this year, "maybe you want to Sell-ify."

Mr. Left has made a name for himself targeting publicly traded firms he accused of engaging in fraudulent tactics, being overvalued or both. His best-known target was Valeant Pharmaceuticals International Inc., which he compared to Enron Corp. in 2015 before its rapid descent.

He has also gone after other pharma and tech stocks including Tesla, Nvidia, Go Pro and Express Scripts. In a brief interview with the Globe and Mail, Mr. Left said he had "very high conviction" about his assertions on Shopify.

With files from Susan Krashinsky Robertson

The Globe tours Shopify's new office located in downtown Toronto

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