Shopify Criticized As Get Rich Scheme by Lawyers

Shopify Inc. chief executive Tobias Lutke addressed criticism from short-seller Andrew Left Tuesday, denying his claims that the company uses illegal marketing tactics to drive growth.

In a conference call following the release of the Ottawa-based e-commerce software company’s third quarter results, Lutke opened by saying “this is going to be a fun one.” He called Left’s claims “preposterous” and said outside legal counsel has assured him they are unsubstantiated.

Lutke said Shopify complies with the U.S. Federal Trade Commission’s rules and keeps its affiliates up to date about their legal obligations. He said Shopify has not been contacted by the FTC since Left released his report.

“We do not sell business opportunities. We sell a commerce platform,” Lutke said. “Implying these businesses are somehow illegitimate is an insult to their hard work.”

On Oct. 4, Left’s Citron Research accused Shopify of promoting a “get rich quick scheme,” saying it made misleading suggestions in marketing materials that merchants could quit their jobs and become millionaires by setting up e-commerce stores using the service. He compared the company to Herbalife Ltd., which agreed in 2016 to restructure its business and pay $200 million to settle allegations made against it by the FTC.

Shortly after the conference call ended, Shopify’s shares fell 13 per cent from Monday’s closing price of US$109.37 to US$95.54, recovering somewhat to US$97.43 by 1:30. Analysts asked for metrics that would provide more information about Left’s claims on the call, but executives did not disclose that information in detail.

Left responded to Lutke’s comments in a release posted online mid-day Tuesday. He said he was “unimpressed” by the response and called on Shopify to disclose its churn rate, or the number of customers who quit the platform after their first year.

“Churn needs to be analyzed, so investors can discount or strip out the dirty/illegal part of their business that will inevitably be curbed by regulators,” Left said. “Citron has assembled a comprehensive folder, which we have forwarded to the FTC, and we are certain that the company will face an investigation for selling business opportunities.”

Left brought particular attention to Shopify’s affiliate marketing program, which gives partners a cut of sales made through links they post to Shopify online. He assembled a collage of screenshots from YouTube videos where people boast about earning huge sums of money through the platform.

On the call, chief operating officer Harley Finkelstein said people promoting Shopify on social media are not necessarily paid affiliates of the company. The affiliate marketers Shopify does partner with are carefully vetted and must comply with disclosure requirements, he said.

“Our team individually approves every partner who applies after looking at their websites, their profiles and whether they’re a fit for our brand,” Finkelstein said. “Our partners are part of our competitive advantage and help us identify potential merchants we may not otherwise be able to reach.”

Don’t expect ‘state secrets’ to be revealed when Shopify tackles short seller’s complaints today
Finkelstein said Shopify recruits most new customers organically or through paid search advertising, not affiliate marketing.

The company had $171.5 million in sales in the quarter ending Sept. 30, topping the average analyst projection of $166.5 million. Shopify also reported adjusted earnings per share of 5 cents, beating estimates for a loss of 2 cents.

“These are good numbers in our view,” said Kevin Krishnaratne, an analyst at Paradigm Capital said. “We would be buying the stock on any weakness.”

Financial Post with a file from Bloomberg

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