Whitney Tilson Asks – Would You Short This Stock? He Would.
I know while you are mired in a stretch with an underperforming portfolio it feels like it will never end. But it will — it always does. When I look back at the period from October 2008 through March 2009, those six months feel like a brief moment in time. While experiencing that stretch it felt like years.
Keeping your head down and focusing on the businesses you own and not their daily stock prices is just as difficult as picking undervalued companies to begin with. But it is part of the process. Time is the friend of the value investor. You have to be patient to let time work for you.
Two years from now when you look at a graph of the stock market for August/Septempber 2011, you will likely have to think to remember what caused the sell-off.
Tilson and other value investors understand that Mr. Market will realize value when he feels like it. In his most recent presentation given to the NY Hedge Fund Roundtable Tilson asked whether you would short this stock:
•In Q2 the company reported net income of -$4.3 million (-$0.03/share), down from a $14.7 million profit YOY, and gave guidance for a loss of 5-6 cents/share in Q3 and 9-11 cents/share for the full year.
•Even using the company's non-GAAP earnings numbers, Q2 profit rose a mere 3% to $0.30, and full-year guidance is $1.30-$1.32, up only 7% (after a 6% increase in 2010).
•Operating cash flow was $83 million last quarter, up 9%, but cap ex was $45 million, up 62%, so free cash flow declined 22% from $48.3 to $37.9 million. TTM free cash flow was $339M, so FCF margin is a respectable 17%.
•On the plus side, the company's customers love the product and it is growing rapidly: Revenues were up 38% in Q2, with TTM revenues of $1.9 billion. The company has $1.3 billion in cash, short-term marketable securities, and noncurrent (long-term) marketable securities (equal to $9.52 per share), with no debt.
•So how much might this rapidly growing, decent-margin company be worth? Before you answer that, you might want to know that the gorilla of the industry, with 32x this company's sales, is making a big push with a directly competitive product which is now available in 40 markets and 41 languages at one-half to one-third of the price.
•So what's it worth? Call me old school, but I think GAAP earnings matter and I think all compensation is an expense, whether it's in the form of cash or stock options. But the company basically has no GAAP earnings to speak of, nor is it expecting any this year, so let's give the company every benefit of the doubt and use its 2011 pro-forma earnings of $1.31, and let's assume it beats estimates and “earns” $1.40 per share. What would be an appropriate multiple in this tumultuous environment? 20x? 30x? Using 30 x $1.40 = $41.40 plus $9.52 in cash = $51.52. As I write this, the stock is nearly 3x this at $136.08, giving it a market cap of $18.4 billion.
The company is Salesforce.com. I don't short anything, but this one certainly looks like Mr. Market thinks it is 1999 again.
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Whitney Tilson (Updated on 05/20/2013)