market folly

Continuing coverage, we're posting up notes from the Value Investing Congress.  Below are notes from the presentation of Zack Buckley of Buckley Capital Partners.  His talk was entitled 'Is it 1999 Again?' alluding to the year when tech company valuations were sky high with bad business models

Buckley made a head-turning statement when he said he was long China frauds and visited 50 Chinese companies.  "When I went to China, I was long, when I came back, I was short."  He argued that shorting all the various Chinese frauds is "played out."


Short Splunk (SPLK)

The company monitors web traffic.  Revenue model: one-time fee for use of the software with a maintenance contract. Annual term fees to license the software, based on indexing capacity. IPO at $17, up 90% first day.  Now $36.72, $4.23B market cap, easy to short, P/TTM sales 27x, Trades at 271x street 2015 EBITDA.

Not just a valuation short, it has a business model problem: switching costs are very low for customers, very little patent protection. Not really a Software-as-a-Service (SaaS) business, since they sell a package.

Only 35% of revenue is recurring, still Salesforce.com (CRM) trades at 8x sales, SPLK at 20x.  Lots of competition: SAP, EMC, ORCL. Squeezed by both huge listed competition, and small new VC-backed firms.

Potential price war, competition charges $34k for what they charge $120k for. 90% gross margin business with negative 10% operating margins. Also insiders are selling aggressively, filing a secondary right after they went public. 65 employees, directors, VC funds, CEO, CFO, CTO.  Lock-up ends in 2 weeks, 31M shares, Oct 15th.

Look at what happened at Groupon (GRPN), Zynga (ZNGA). Trades at 27x TTM, unprofitable.  Buyout unlikely, as comps were around 7-8x price/sales.  68% over-valued, could be a $12 stock.

Assumptions for bull case to work: 40% 5 year growth, 29% FCF margins, and 45x multiple.  FCF margins are 1/6 that level now.

Question & Answer

But revenue is doubling every year?  Yes, but the rate of growth is slowing. shorts have been wrong on CRM for a long time, is it the same?  He says if it does grow like that, maybe, but it has very little recurring revenue, whereas CRM has 90% recurring revenue with high switching costs.


Embedded below is Buckley's slideshow presentation from the Value Investing Congress:





Be sure to check out the rest of the hedge fund presentations from the Value Investing Congress.