Shopify shares plunged more than 11 per cent Wednesday after a short-seller report alleged the e-commerce platform is overvalued and operates outside the law.
"This is not an $11-billion company," said Andrew Left, managing editor at stock commentary website Citron Research, in a video where he claims Shopify's business model does not comply with guidelines set by the Federal Trade Commission.
The company "has mastered the good ol' get-rich-quick scheme," he said, comparing its practices to those of Herbalife, which recently settled with the FTC for $200 million and made structural changes after claiming members could "quit their job" upon joining the company.
Left, an activist short-seller whose previous Citron Research reports moved the direction of shares for the likes of Valeant and BlackBerry, said the stock should be closer to US$60, prior to any potential involvement by the FTC.
He questions how many of the 500,000 businesses Shopify says it powers are legitimate.
He alleges Shopify's partners recruit merchants by wooing them with promises of self-employment and million-dollar incomes. Left points to content on Shopify's website and social media, like a statement that 2,700 people become millionaires daily and a sample resignation letter.
The company's stock (TSX:SHOP) fell $16.75 or 11.5 per cent to $128.95 on the Toronto Stock Exchange, and US$13.51 or 11.57 per cent to US$103.30 on the New York Stock Exchange.
Some have questioned the company's high valuation.
It first went public on both Bay and Wall Streets in a dual initial public offering in May 2015, when it raised a larger-than-expected US$131 million.
Short sellers, who believe a company's share price is over-valued as they profit if it falls, have targeted the stock since.
On the TSX, some 367,000 shares or less than one per cent of the company's float have been sold short. In New York, about 5.25 per cent of Shopify's shares or 4.1 million have been sold short.
"The stock is going lower, cautious investing to all," Left said.
- With files from the Associated Press