Zack Buckley, is the founder of Buckley Capital Partners. Buckley Capital Partners is a concentrated, long-biased, value based, hedge fund. Zack Buckley is currently speaking at the Value Investing Congress in New York. The topic of his presentation is ‘Is it 1999 Again?’
Nomad Investment Partnership: Keep An Eye On The Unseen Risks
There are many ways to define risk. Warren Buffett has said that "risk comes from not knowing what you're doing." Q3 2020 hedge fund letters, conferences and more His mentor, Benjamin Graham, believed that risk should be measured as the chance of a permanent capital impairment of an investment. Seth Klarman also holds this view. Read More
Zack began his career managing separate accounts in Miami in 2007. He started his hedge fund in 2011 and today is focusing on his favorite short idea: Splunk (SPLK)
Early in his career Zack was long many Chinese companies, until a trip to visit 50 Chinese companies that really changed his perspective. On that trip he visited many abandoned factories and underwhelming pig farms for stocks that he owned. He sold many of those companies immediately and thus began his career as a short seller.
Zack insists that Splunk is not only an overvaluation short, but also a business model short. Splunk captures data from multiple sources and provides real time intelligence Splunk’s market niche is being squeezed and they do not have any patents to fend off competition. With larger companies entering the market, and a commodity type product, Zack thinks Splunk is going to begin a pricing war shortly. Customers are unhappy and leaving for other providers, meanwhile analysts are projecting continued rapid growth for SPLK.
While high growth companies should spend money to accelerate growth, SPLK is not showing operating profit on their sales today. The consensus sell side EBITDA projections are 4% of sales.
Management is incentivized mostly by bookings, which is not the best metric for shareholders. Insiders have sold roughly 10% of stock since going public. Overall the C-suite, the VC funds, and management has been selling with the lockup period expiring shortly.
Zack examined the bull case from the sell-side which assumes over 40% revenue growth over the next 8 years. If SPLK grows at the rate that SalesForce did, then maybe it can justify the extreme valuation is carries today. But overall Zack believes SPLK is not a SaaS product and does not have the same stickiness that SalesForce has. Growth so far has been very impressive, but he knows of 10 – 15 new companies entering their segment in the next few years.
Overall the business has a very low moat, heavy insider selling, and is trading at a valuation that he believes is 70% overvalued. He learned the importance of very in-depth due diligence from his experience with China and believes SPLK is approaching headwinds.
12:22 EST: Q&A
Today Zack thinks that it is really difficult to find short opportunities in China. Most of the frauds are already sub $1 and the low hanging fruit is already discovered. It used to be that an investor could walk into a vacant factory and immediately know the stock is a fraud. Today the frauds are much more complex and tougher to find.