Is Whitney Tilson After Another High Profile Short?


Renowned value investor Whitney Tilson is no stranger to making contrarian calls and shorting high profile stocks.

Back in December, Tilson initiated a substantial short position on Netflix Inc. ( $NFLX ) and published his rationale on the popular finance blog SeekingAlpha.  Almost immediately after Tilson put his short in place, Netflix delivered strong Q4 earnings the stock began to surge to new highs.  Finally after being down more than 25% on the failed bet, Tilson threw in the towel and covered his short.

Tilson’s failed short is a classic example of how a high-tech business model like Netflix don’t necessary fit into the constraints of a discounted cash-flow model or modern valuation techniques.  Clearly, Tilson and his team at T2 Partners made a fundamental valuation error and undervalued Netflix by a wide margin – it was a huge miss.

So did Tilson learn from his experience in shorting high-tech business models that are difficult to valuate?

Apparently not.

Whitney Tilson is at it again with yet another high profile short in the works.  He was recently giving a presentation on his top investing ideas, but these last few slides grabbed my attention.

So there you have it folks.   Another Whitney Tilson short appears to be in the works, but this time the target is Salesforce.com ( $CRM ).

Here are some of the key reasons behind Tilson’s short thesis for Salesforce.com:

  1. Competition is intensifying and could cause CRM’s margins to compress substantially.

    2.  

  2. The company is doling out too many stock options to their employees, which caused the share count to rise by 7.3% Year-Over-Year.

    3.  

  3. Insider selling at CRM is occurring at a rapid pace – the company has the 2nd highest level of insider selling of any company in the U.S. Market.

    4.  

  4. If you use a 30x multiple on pro-forma EPS of $1.38 and add the $10 cash/share, it would give the stock a value of $51.40.

Tilson makes some good points, but his fundamental error is viewing Salesforce.com through the lense of a traditional value investor.  Value investors often make mistakes when they try to apply Warren Buffet style valuation metrics to cutting-edge business models like $NFLX or $CRM.

If you look at everything on a purely fundamental and balance-sheet basis, you are going to miss out on many great investment opportunities.   The fact is that valuation metrics change and you can’t try to value a company like Salesforce.com with the same model that you use to value a railroad company.  It just doesn’t make sense at all.

Sure the valuation is steep, but that is a function of their SaaS business model and how their revenue growth is essentially uncapped.  $CRM is the clearcut leader in this space and they have a host of exciting technologies in their pipeline.  They currently occupy the dominant position in the highly-coveted Software-as-a-Service domain.  Personally, I would not bet against Salesforce.com.

I thought Whitney Tilson would learn from failed $LULU and $NFLX shorts, but it looks like he is back at it again.  What do you guys think?  Is this going to be a good short for Tilson, or will it be another $NFLX / $LULU ?


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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