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Oct 10, 2017

Shopify’s performance 'based on a lot of euphoria': Money manager

A short on Shopify while betting on the bull

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Shares of Shopify (SHOP.TO) extended their declines in early trading Tuesday and at least one Canadian money manager is betting on further weakness. In an interview on BNN, Dynamic Funds Portfolio Manager Alex Lane said he had taken up a short position in the Ottawa-based software company, echoing some of the concerns surrounding customer turnover raised last week by Citron Research.

“I believe that a lot of things raised in the report last week go to the root of some of our concerns, as there’s this birth-death ratio for the company where they have to continually replenish customers — about 40 per cent of their customers each and every year,” he said. “And the larger you get, the harder it get to replenish those customers.”

Lane said he took up his short position right around the same time as Citron’s Andrew Left issued his wide-ranging report, which took issue with not only the turnover, but also Shopify’s marketing practices. Lane said his main issue with the company pertains to the lasting power, or lack thereof, of the small merchants using the ecommerce platform.

“The bulk of the customers who are paying those monthly fees are not necessarily successful small business owners,” he said. “They have a birth-death ratio where a lot of them die off, and the new ones start up, and have to replace them to keep that part of the revenue stream going.”



Lane said he did not share Left’s view the company was operating as a multi-level marketing scheme, merely that the company’s valuation had run too far, too fast, given his view of the high turnover rate as a structural impediment.

“It’s nothing against the business model, or anything like that. They’ve done a fantastic job, it’s great to see the creation of a new Canadian technology champion,” he said. “Valuation got a little bit ahead of itself, I would say, and if you’re looking for pockets of euphoria in the market, that was clearly a stock that was based on a lot of euphoria.”

Lane said he doesn’t anticipate holding his short position in the firm for the long-term as multiples return to more reasonable levels.

“There isn’t anything to suggest any fundamental deterioration at this time, but the stock had gotten ahead of itself,” he said. “Similar with Valeant, you see some of the bloom come off the rose and the multiple contracts for a period of time.”

“Sometimes, when you’re at that euphoric inflection and you get that downturn, it goes on for longer on the reset than you think.”