I asked about this before with no reply, so I’ll try again. There’s an inconsistency about your analysis that bothers me…In the Knowledgebase, quoting ptheland: “So I’d say the first step in evaluating a business is to look at their management. Honest management will give honest financial statements. Dishonest management will give dishonest financial statements - even if those statements follow GAAP.”
Yet here, in discussing what’s to like about SHOP, nowhere do you say that you believe Shopify management to be honest or trustworthy or exhibit integrity. It would seem it would at least rate a mention. I’d actually expect some evidence for said belief as well, given the care put into providing meaningful evidence of financial performance…I’d appreciate it if you would explain.
Hi IGU, That’s so far out that it’s hard for me to tell if you are kidding or serious. Perhaps you’ve noticed that I don’t specifically say anything about the integrity of management for any of my other companies either. I’m not an accountant. I usually don’t even read the SEC submissions. If you are waiting for evidence for my beliefs in management you’ll wait a long time.
The quote from the Knowledgebase is taken way, WAY, out of context. It was from a discussion, NOT about management and honesty, but about GAAP vs Adjusted Earnings, and the quote was that crooked management could even give false GAAP results, and the point was that if you have confidence in management you should accept their Adjusted numbers. That has nothing to do with your point.
If I lose confidence in management I usually get out, or stay out. Here are some examples:
Ubiquiti - A few years ago, the CEO and major stockholder was spending all his time with his NBA team and treating Ubiquiti as a sideline. He acted annoyed when analysts asked questions on the conference call, he didn’t know the answers. He was busy firing his basketball coach and trying to coach himself, also challenged pro players to 1-on-1 basketball games. (Was he off his medicine?) I got out. Nothing crooked or dishonest, just wasn’t focussing on the business. The business stagnated for a couple of years. (This is no longer true of course).
Synchronoss - Here’s what I wrote at the time:
After a long wait, they finally turned the corner. Their cash cow activation business had slowed down but was still raking in the dough. Their cloud business had become over 50%. Their new enterprise business… was finally bearing fruit. Earnings had taken off again after several quarters of flatlining. All they had to do was sit back and rake it in.
So what did they do?
1. They sold their cash cow, which was guided to be $74 million for just the next quarter, and 37% of their total revenue for the quarter. That’s wrong! You keep your cash cow legacy business until it becomes a small enough part of your total that you don’t miss it.
2. They are taking on new debt of $900 million which is roughly half their capitalization.
3. They are acquiring a company that they clearly didn’t need (based on the “sit back and rake in what you have earned” scenario). This is a huge acquisition. This acquired company is almost half their size, is losing money, and has grown revenue VERY slowly. Why is SNCR doing this?..
4. The CEO that has made them so successful is choosing this crucial moment, with everything in flux, to remove himself from the day to day running of the company.
5. And who is replacing him? The CEO of the slow growing, money-losing huge acquisition. What a great choice.
This is no longer the company I was invested in. It’s barely recognizable. It’s an unknown quantity, with a huge debt load, less revenue, and a CEO who is also an unknown quantity. It may do fine, but it will do it without me.
I thought that the CEO was doing a favor for an old friend or something, bailing out his friend’s business by buying it with stockholders’ money, and then installing the old buddy as CEO of Synchronoss. Just my suspicion. I have no evidence for it. Maybe he was just incredibly stupid, but I doubt it. I sold at about $30 as I remember, and rising. The current price is $9.
Elon Musk and Solar City
I really like Elon and feel he’s doing a great thing in making electric vehicles mainline. Buying Solar City was something else. The way I figure it, Elon had gotten his cousins into Solar City, but conditions changed and they could never make a profit and were going downhill fast. I’d guess Elon felt responsible and decided to bail them out (with Tesla stockholders’ money). Not really dishonest, but not really ethical either. Who knows, it may work out in the end.
This has nothing to do with crooked or not crooked, but because Bezos had no interest in making a profit, just growing a business forever at breakeven, that wasn’t my thing. When they started showing positive Cash Flow, and then even positive earnings, I got on board and rode it from $540 to $970 or so, but I exited when it became evident that any profit was just an accident.
Thus, as you can see, I exit when I lose confidence in management, not when I have “evidence” of crookedness or lack of same. It happens that I have a lot of confidence in Shopify’s CEO and major stockholder, but I have no evidence for that at all (except perhaps his ski-boarding story). I just like him. I can assure you I’ve never examined the company’s books, and never intend to. I definitely don’t retract myself to companies where I have “evidence” that the management is honest. What I do do is get out when I’m dissatisfied with management for whatever reason.
I hope that this helps,
For Knowledgebase for this board,
please go to Post #17774, 17775 and 17776.
We had to post it in three parts this time.
A link to the Knowledgebase is also at the top of the Announcements column
that is on the right side of every page on this board