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Shopify defends its business model

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Shopify has yet to turn a profit since it was founded in 2004.
Shopify has yet to turn a profit since it was founded in 2004.

Shopify defended its business model yesterday, a day after short-seller Citron Research criticised the Internet-commerce software provider's marketing practices, wiping about $1.5 billion off its market value.

"We vigorously defend our business model and stand resolutely behind our mission and the success of our merchants," Shopify said in a statement. The company said retailers using its software generated $10.7 billion in gross merchandise volume in the first half of the year.

Shopify shares were down 1.7% at $101.53 in midday trade on the New York Stock Exchange, after plunging as much as 9.7% earlier in the session. The stock fell 11.6% on Wednesday after Citron founder Andrew Left said the company "oversells" the potential for its customers to make money.

The fast-growing but unprofitable company has lost around $1.5 billion of market value since Citron released its report on Wednesday, in which it gave the stock a $60 price target.

The allegations in the report will likely hang over Shopify's stock performance at least until the company's next earnings release on 30 October, said Paradigm Capital analyst Kevin Krishnaratne.

"This is a stock that nearly tripled year-to-date, so a breather was probably due to occur," said Krishnaratne, who has a "buy" on the shares and a $120 price target.

The stock is expensive relative to peers, currently trading at an enterprise value of more than nine times next year's average sales. Rivals including Workday, Kinaxis and Zendesk trade at an enterprise value of about six times next year's sales forecast, he said.

Shopify has been a darling with Canadian investors since its initial public offering in 2015, when it set an IPO price of $17.

The company's US-listed shares were changing hands at more than five times the average daily volume on Thursday, while volumes on the Toronto Stock Exchange were double the 90-day average.

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