Short seller fires second torpedo in bloody battle with tech darling

If there is enough smoke billowing from a company that investors can’t actually see what’s going on then there doesn’t need to be a fire to justify selling. And this is precisely why shares in one of Australia’s tech darlings, WiseTech, have fallen more than 22 per cent over its past two trading sessions.

The first scramble for the exit was triggered by a scathing report from hedge fund J Capital in which it contended WiseTech, a logistics software company, had inflated its revenues and its assets.

WiseTech chief executive Richard White is formulating a response to JCap's second research report targeting the business.Credit: Steven Siewert

This report landed on Thursday prompting WiseTech to halt share trading on Friday so that it could refute J Capital’s findings.

But no sooner than WiseTech had responded to the report and the shares started trading on Monday morning,  J Capital released is second torpedo, which picked holes in WiseTech’s attempted repudiation and found a new avenue of attack.

This time the short seller homed in on WiseTech’s history of poor acquisitions and alleged the logistics software group had misled investors on the real rates of customer attrition from its main product CargoWise.

The shares were hit a second time - down another 12 per cent in an hour. Once again WiseTech halted trading in order to respond to the latest salvo.

The hapless investors that may have wanted to sell can do little but strain their necks as they watch the two combatants, that are locked in a high stakes argument, lob insults back and forth.

And with so much smoke it is extremely difficult for shareholders to know who to believe.

Even if WiseTech’s accounts are pristine there remains one logical reason that investors should be concerned. The stock is trading on a price-earnings multiple of almost 150 times which means it is wildly expensive.

This company listed in 2016 for $3.35 a share and until last week was trading at more than $33.

When a company is priced at these nose-bleed levels there can be no room for error. These companies need to grow revenue or profit exponentially to justify the share price.

Any suggestions that profit or revenue have been pumped by accounting treatment would be a concern.

In WiseTech’s case its aggressive acquisition strategy, which has seen the company invest $400 million on new businesses over the past three years, could be considered a red flag, particularly to short sellers.

Although this may not be a problem in and of itself, rapid-fire acquisitions can cloud the picture for investors who are unable to read through comparisons from one year to the next.

Excessive growth through acquisitions can also result in indigestion and execution risk.

We believe that when WiseTech slows or stops acquisitions, shareholders will realise they own a motley global collection of small, poorly-integrated companies with dispirited staff.

J Capital

Another in any short seller’s repertoire of red flag issues is executives/directors/founders selling shares. There has been a bit of this going on which isn’t a great sign but most still own a reasonable chunk of stock.

All of these features mean that WiseTech is ripe picking for a short seller - regardless of whether the concerns are legitimate.

And history shows that plenty of these kinds of highly critical reports unearth some major problems within companies.

Not all have been life-threatening but they have had a major impact on the value of their shares.

J Capital is running the argument that WiseTech’s strategy to growth through acquisition is flawed.

It describes as "bollocks" comments made by WiseTech chief executive Richard White on a recent earnings call that, "Our acquisitions are strategic, not revenue roll-ups. We are building highly efficient and scalable mini WiseTechs with significant market positions and key customer bases across the world".

J Capital says that because the companies WiseTech acquires don’t produce the desired results, it just accelerates acquisitions to keep the growth narrative going.

"We believe that when WiseTech slows or stops acquisitions, shareholders will realise they own a motley global collection of small, poorly-integrated companies with dispirited staff," J Capital says.

It’s a big call but one that has inflicted a couple of billion dollars in value damage in two days.