Shopify (SHOP 1.73%) is a hot topic this year. The stock has gained more than 300% since its 2015 initial public offering, thanks to rapid sales growth and confidence that the business will continue to scale quickly. However, that confidence was shaken recently, after a headline-grabbing report from Citron Research brought a range of risk factors to into focus. 

Shopify is a company with compelling potential, but it's undoubtedly a risky investment. That doesn't mean it can't be a long-term winner, but shareholders and those thinking about investing in the company would be wise to understand why the bears may have a point about the budding e-commerce platform.

A drawing of a bull and a bear facing each other.

After a long bull run, the bear case on Shopify has recently gained some ground. Image source: Getty Images.

Investors might not have a clear picture

The Citron report charges that Shopify engages in practices that are giving investors an inaccurate view of the business. As the report suggests, it's possible that Shopify will face FTC scrutiny for overly aggressive marketing. For example, the company's blog runs articles with titles like "How to Build a Multi-Million Dollar Ecommerce Business With $0 Marketing Budget." Neither Shopify nor the FTC has commented directly on this matter, and without a clearer look at the business, the possibility of regulatory involvement can't be completely discounted. 

Another criticism levied at Shopify in Citron's report is that the e-commerce company is being propped up by what essentially amounts to affiliate marketing schemes. This charge has two components. It's possible that a significant number of the company's customers aren't selling actual goods or are part of a "pyramid scheme" type of network where the value of goods being sold is being inflated. These aren't the type of businesses that are likely to create lasting revenue streams. The other element of the "affiliate marketing" risk factor is that Shopify itself is offering of up to $2,000 for referring new Shopify Plus members. Without a clearer look at these ongoings, it's possible that this program is being abused and inflating the sales growth picture.

Shopify is priced for the bull market

Shopify is a bull-market darling, but the company's share price could be hit hard in the event of worsening economic conditions. That's down to much more than investors' willingness to pay more for growth when the market outlook is strong. If another recession were to hit, Shopify's business would probably see a range of material setbacks. Tougher economic conditions will mean fewer businesses are started and more business close, limiting the company's addressable market and slowing its sales growth.

Today, consumer confidence is at a 13-year high, but if that takes a turn for the worse, the merchants on Shopify's platform will probably post smaller sales and commission revenues will be affected.  That's not to suggest that investors should attempt to time the broader market, but it's worth considering that the company's current share price might not reflect the extent to which performance could slow in the next bear cycle.

Shopify has consistently posted operating losses representing roughly 10% of revenue since going public. The counter-argument here is that it could improve earnings if it reduced advertising and marketing expenses, but if that were to significantly affect sales growth, shares could still be overpriced at current levels. The company has also been diluting its stock, increasing its shares outstanding by roughly 48% since its initial public offering. 

Shopify needs to navigate competition and partnerships

Most of Shopify's client base consists of small and medium-sized enterprises, but the company sees moving upmarket as one of its key growth avenues. Its Shopify Plus service carries a $2,000 base monthly rate and already counts big brands including Tesla, Anheuser Busch-InBev, and Red Bull among its subscriber base, but continuing to win customers in the large-enterprise e-commerce space will increasingly involve going up against embedded and deep-pocketed rivals such as Oracle, SAP, and

Shopify has already seemingly fended off Amazon as a competitor and won the e-commerce and cloud giant as a partner. However, it still faces credible rivals in its core space. Companies such as Wix and Square have designs on the same addressable market, and new competitors are likely to emerge as well.

Other growth avenues, such as online payment processing, are highly contested. Based on comments from Shopify's Aug. 1 earnings call, the company would like to get its online payment software embedded as a feature in mobile hardware. That hinges on beating out or coexisting with a range of other payment services -- including those from hardware makers such as Apple, Samsung, and Alphabet

Understand the risk-reward profile

Right now, Shopify's valuation is based on its potential to be a great business over the long term. Overall, I think the company has what it takes to live up to that potential, but this is an instance where merely delivering "good" performance could mean substantial valuation declines. 

In a recent article, Motley Fool writer Brian Stoffel laid out counterpoints to the bear thesis on Shopify and explains why the stock looks to be a worthwhile investment. I'm in agreement with much of what he has to say in that piece but recommend that investors continue to research the risk and reward involved to arrive at an informed decision on whether Shopify is a good fit for them as a long-term investment.