David Einhorn’s Greenlight Q2 letter 2017 to investors can be found below – but first an excerpt below on short positions
Excerpts from Greenlight Q2 Letter 2017
The short book proved more costly, though in aggregate it rose in line with the market. The bubble basket was particularly frustrating. Here are some examples from the bubble basket (in alphabetical order):
Amazon (AMZN) rose 9% for the quarter to $968 after modestly beating March quarter sales and earnings estimates (which had been reduced when the company announced December results). However, it again guided down next quarter estimates to well below consensus expectations. Since last October, consensus 2017 earnings estimates have fallen significantly from $10.75 to $6.73, while the shares have risen 16%. Correspondingly, the P/E multiple went from 76x to 145x. Late in the quarter, AMZN announced the purchase of Whole Foods for $14 billion, essentially buying a “brick and mortar” footprint of mostly leased retail space for over $800 per square foot. When companies announce large acquisitions, they typically explain the implications and strategy. AMZN has said nothing and left the interpretation to the market’s imagination, which for the time being skews optimistic.
Athenahealth (ATHN) finished the quarter up 25% to $140.55 despite falling almost 20% on the day after it announced first quarter earnings. For the first time in its history, the company sharply reduced its full year guidance (which it had provided in December). ATHN has long touted itself as a 30% top line grower, but revenues grew by 12% in the March quarter and are expected to grow only 11% for the year. Significantly, ATHN’s one-time opportunity to benefit from doctors using government subsidies to adopt electronic recordkeeping has passed.
In May, Elliott Management announced a large stake in ATHN. The shares immediately repriced. We can’t say for certain that no one will buy the company for an inflated price as we have seen bad acquisitions before. However, we disagree that the math works for a going private transaction. With a $5.6 billion market cap, only $120 million of expected EBITA ($55 million if you include stock compensation as a real expense), no historical free cash flow after capital spending, and rapidly decelerating revenue growth, we don’t see how an acquisition works for a buyer.
Netflix (NFLX) missed guidance for new customers and increased its forecast for cash burn. The company’s key metrics are all deteriorating and customer acquisition costs are higher, yet the stock ended the quarter up 1% to $149.41. Cash investment in content is now more than 100% of revenues, and the company is growing its content spend per customer faster than it is growing revenue per customer. The company is showing improving GAAP margins by slowing its amortization of content investment, but there isn’t enough information disclosed to determine whether there is a good justification for this seemingly aggressive change. In any case, the company has not demonstrated that its heavy investment in content yields a positive economic return. Further, despite the availability of nearly free equity, NFLX is funding its cash burn with debt.
Tesla (TSLA) finished the quarter up 30% to $361.61. TSLA bulls look at Elon Musk, think of Steve Jobs, and decide TSLA is the next Apple. We have read many critiques of TSLA and we won’t repeat them here, but we will offer a few distinctions from Apple:
- When Apple launched the iPhone, it was immediately profitable. Apple has always cared about profits. TSLA does not make money selling cars, and Mr. Musk shows little interest in profits.
- When one person buys an Apple product, it makes the experience for other Apple customers better by supporting the developer ecosystem. This network effect attracts a stable and growing user base. TSLA is unlikely to sustain a competitive advantage by having a network of charging stations or by accumulating driver data.
- Competition was very slow to develop for Apple. Its peers (most famously Microsoft) publicly dismissed the iPhone as a threat. By contrast, every major car company in the world intends to compete with TSLA in electric vehicles. Consortiums are installing competing charging networks, and many competitors (including possible new industry entrants) are investing in autonomous driving.
- Steve Jobs attracted and retained a senior team of loyal lieutenants who implemented his vision, and Apple continues to have a deep bench. Mr. Musk is a one-man show (and one distracted with many ventures at that).
We closed out our profitable short position in Mallinckrodt. A few years ago, we suffered sizable losses when the company inexplicably bought one of our large shorts, Questcor, the manufacturer of the problematic and controversial drug Acthar. We rolled that position into Mallinckrodt, whose shareholders ultimately paid for the unwise acquisition.
Full Embed Of Greenlight Q2 Letter 2017