Activist Shorts Weekly W37

Activist Shorts Weekly W37
  • This week, we have registered one new major short call.
  • We saw a newcomer release a report on ETSY, an e-commerce platform, apparently in deep trouble with the competition and other key business fundamentals. The management also supposedly tries to spin AI talk, but the result is not visible.
  • Citron targeted the same company in February of this year due to allegations of regulatory risks regarding counterfeit goods. The stock is down 53% since, but the activist might not see further immediate downside opportunity as the situation has gotten better. 
  • Lastly, we are tracking the most recent stock price gyrations at several previous targets. We focus on a failing AI pivot, a questionable smart lock company and a rebounding used car business. 

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Bits and Pieces

  • Gotham City released an update on SES Imotag (SESL) and delivered a report talking about the company's response to the initial report in July. The activist believes the short thesis holds as the company itself is acknowledging many of the risks. 
  • Friendly Bear sees more Applied Digital (APLD) craziness ahead as they allegedly continue to confuse the market. The stock is down 46% since the initial report. RILY, a bank which is tied to APLD, is not spared of this as the shares are down 18%. 
  • Scorpion Capital is taking proactive steps in their campaign against Harmony (HRMY) as they counter patent claims by the biotech. The initial report talked about allegations of a fraudulent drug and questionable corporate governance. The stock has fallen at first but started to rebound recently. HRMY is down 8% since Scorpion's initial report. 
  • Know Labs (KNW) is hitting new 52-week lows as White Diamond has registered another win in the microcap arena. The stock is now down 68% since the initial report alleging stock promotion and a dubious business model.
  • NINGI sees further downside at Brp Group (BRP) as leverage seems to increase. The stock is down only about 18% since the initial report talking about allegations of dubious accounting and a weak business model.

Big Movers

This week, we have seen several stocks move in the right direction for the short-sellers. One of the biggest movers in the right direction was a new campaign targeting Innodata (INOD), which plunged 16% in the past five days. It was a newcomer called Ragnarok Research who targeted this AI business due to allegations of a dubious business model.

Most importantly, the report believed the company's recent shift to AI will not create much shareholder value. The business does not seem to have developed anything unique. They seem to be using their existing business as a cover to try and persuade the market that they can play in the AI space while their fundamentals continue to deteriorate. 

The stock seems to have entered a bearish downtrend, as INOD is now down 28% since the release of the report. The market is likely agreeing with the thesis and there are several bears on Twitter which have said that INOD is likely to have gotten ahead of itself. 

There are bulls trying to counter the arguments, but the energy is nowhere near the usual retail optimism. 

Another stock that went in the right direction for short-sellers was SmartRent (SMRT) which is down more than 8% in the past five days. This electronic lock business was targeted just last week on Friday by Bleecker Street Research due to allegations of security vulnerabilities in their smart locks.

Most importantly, as per the activist, SmartRent's smart locks have been associated with security breaches. In one instance, after the installation of SmartRent locks in an apartment in Alexandria, Virginia, a man was able to access several apartments, leading to a sexual assault incident. 

The concerns have been accepted by the market and the stock retraced after the report. Bears further supported the thesis after the release, piled on and highlighted the heightened risks. 

There was little pushback on Twitter. 

On the other side of the tracks, we saw only a few stocks going against short-sellers in a major way. One of the biggest movers was Carvana (CVNA), which jumped about 19% in the past five days. This used car company was targeted by Kerrisdale Capital due to allegations of a broken business model.

Most importantly, the report believed the company's recent share price action is disconnected from reality. CVNA is still unable to generate profits, and that was true even during COVID when CVNA was in a perfect position to maximize their potential. Therefore, the optimistic recent results are apparently unlikely to accurately represent the dire situation.

It seems the short thesis has not worked out, at least so far. Retailers are pumping the stock higher in the hopes of a never-ending short squeeze. The shares are up over 192% since Kerrisdale wrote about the 'irrational' price action. The most recent surge does not seem to be connected to fundamentals, and the Twitter chatter is still widely focused on the short-squeeze data. 

Another shot at ETSY 

This week, we also saw a newcomer activist target Etsy (ETSY), a $8.2bn e-commerce business, due to allegations of a dubious business model.

Most importantly, the report believes the company is about to get into a turf war with a competent competitor who is willing to cut prices and give ETSY a run for its money. This is apparently the first time the platform would face such a player eager to get into the business. The activist believes ETSY is not ready and the competitor will only accelerate negative business trends. 

Moreover, ETSY has been losing its COVID19 customers which gave it a premium valuation compared to other season e-commerce platforms. The management is trying to paint an AI upside picture, but the activist finds this effort dubious and questionable. In the meantime, insiders are selling the shares. 

Due to all this, the short-seller sees a significant downside opportunity. The market is likely to eventually sell the shares as the company's fundamentals are likely to continue to deteriorate for the reasons above. 

The stock did not react to the report, and the reaction on Twitter was mixed. Some said the report just summarizes things that are already priced in and that the competition risk is overplayed. The AI angle is also apparently a dead end as a bearish argument.

It should be noted that Railroad Ranch is not the only one who wrote about ETSY. Earlier this year, it was Citron who also saw numerous red flags. However, Citron wrote more about regulatory risks when it comes to counterfeit goods. So far, the DOJ did not act, but ETSY is down over 53% since their initial report. Citron released a small update below saying that the situation is better. Thus the downside opportunity might be smaller or over.

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* Note: Presented data and analytics is as of available on 2023-09-15 UTC 12:00.

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