Does Shopify Have a New Facebook Problem?

Shares of Shopify (NYSE: SHOP) are hitting new all-time highs again this week, but it doesn’t mean that the coast is clear for investors. Facebook (NASDAQ: FB) is beefing up the safeguards on its site when it comes to fraudulent or incompetent e-commerce advertisers, and it’s easy to see how Shopify’s business could be in its crosshairs.

Facebook announced on Tuesday that it’s taking steps to improve its customer service by encouraging users to leave feedback on advertisers. Advertisers that get continually flagged for failing to live up to promised shipping speeds, engaging in product misrepresentation, or offering up vague return policies may have their ad limits reduced, or be banned entirely. Amplifying the user experience with Facebook advertisers to smoke out bad actors could be grim news for some Shopify merchants that are either inexperienced or just outright unscrupulous. It’s not Shopify’s fault, but it can certainly become Shopify’s problem.

Image source: Shopify.

Not every cottage is the same in a cottage industry

Shopify has ignited the entrepreneurial spirit, giving anyone the ability to set up a slick digital storefront with minimal effort. The platform rocks, and there are now more than 600,000 e-commerce outlets fueled by Shopify. The problem is that a lot of these unseasoned shop owners don’t have the fulfillment experience to expedite deliveries and process returns.

We live in a time in which Amazon’s Prime shipping has spoiled more than 100 million people into expecting deliveries in two days at no extra cost. Slow shipments and vague product descriptions are so 1998. There’s no way to tell if this will impact a few or many online merchants and drop-shipping specialists, but there’s a heavy presence of Shopify entrepreneurs on Facebook as a way to generate leads.

This isn’t the first time that events at Facebook have been interpreted as being problematic for Shopify’s business. Citron Research was arguing three months ago that the then-percolating Facebook data-harvesting scandal could rock Shopify, but this week’s changes could prove to be even worse. Shopify can’t control the quality of the hundreds and thousands of stores on its platform. It provides the sandbox, but it can’t reasonably police what folks do inside the sandbox.

Shopify is doing fine at the moment. Revenue soared 68% in its latest quarterly report. Even as growth decelerates — Shopify itself is targeting just 52% to 55% growth in the current quarter — it’s firmly established as a monster growth stock.

However, Citron has argued in the past that the quality of Shopify’s 600,000 storefronts could be lacking, and we now have Facebook trying to do a better job of policing its site for the advertiser horror stories often buried in comment sections. Facebook is trying to clean itself up; Shopify had better hope that many of its budding entrepreneurs feel the same way.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends AMZN, Facebook, and Shopify. The Motley Fool has a disclosure policy.

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