Square -What the short attack actually said!

What Mark Palmer actually said.

I have a copy of the sell recommendation and analysis from Mark Palmer that sent Square down 15% or so today. I’m not allowed to post it all of course, so I’ll give you a little summary of his points (some of which I felt were laughable). For instance:

He makes the assumption that investors have identified Square as a company that would be especially benefitted by tax reform, because tax reform would be beneficial for small businesses, and SO, if tax reform fails to be enacted, it might sell off. (Boy, that was a convoluted argument. I’ve never heard anyone say Square would be helped more than other companies by tax reform. I think he set that up as a straw man, so he could then imagine it would be hurt if tax reform didn’t go through. Never mentioned what would happen if it did go through, though).

Another convoluted argument. He says that this is an especially good time for small businesses that Square deals with, and when a recession was threatened in the past, Square didn’t do so well. (Well neither did anyone else, and a recession is one thing that almost noone sees as a realist immediate danger).

Another convoluted argument. He says part of Square’s rise is tied to “the current Bitcoin mania,” and then he worries what will happen if the bitcoin mania suddenly ends. (Square is doing a tiny experiment with Bitcoin, and none of its revenue and earnings rises have been tied to it at all. Another strawman! You may doubt that anyone would say something so silly, but here are his exact words: “Another factor that could weigh on SQ’s multiple is any pause in the current Bitcoin mania.” I think Bitcoin is a mania too, but I don’t see any sign that it will suddenly go away so you should sell your Square [Maybe your Nvidia]).

Next he attacks Square’s move into Square Capital (which everyone else loves), feeling that Square is taking on increased credit risk. And that Square seeking an Industrial Loan Charter “heralded an increased credit risk”.

Square also set aside $3 million against possible loan losses this quarter as its loan portfolio has continued to grow. Mark Parker said “We were concerned about the $3.4mm charge related to loan losses that SQ took… versus no such charges in the prior year period” and “While SQ only retains a small portion of the loans it originates and therefore has limited exposure to direct loan losses, such losses nevertheless have an impact on Square Capital’s operating model.” Etc.

Next, his low valuation is based on his Estimates for Sales and Adjusted EBITDA. He includes a table. Let’s see, he uses gross sales instead of the lower adjusted revenue, BUT he estimates JUST A 2% SEQUENTIAL increase in SALES in the Dec quarter (Black Friday, Xmas, etc) over the Sept quarter!? Who is he kidding?

And even worse, for adjusted EBITDA, which last year went $13 million, $12 million, $30 million (!) in the final three quarters of the year — this year he’s estimating $36, $34, $36 million (!) in the same three quarters. So last year the December EBITDA was up 150% sequentially, so this year he estimates it will be up 6%!!!

He will evidently do, or say, or estimate, anything at all to make his short thesis sound good. So if you are worried about a big Square position you are holding, don’t worry on the basis of this. This is just a short attack, worthy of Citron, with no meat at all. Parker just saw a stock rising rapidly and must have said “Let’s take a short position and I’ll figure out some way to write an attack article".

Hope this helps,

Saul

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Saul, thanks, you calm analysis is priceless.

To everyone else, be cautious grabbing a falling knife on a growth stock like this. I do like that it was caused by a “bogus” short sell argument, but IBD has also been pointing out that it was extended recently. So it was due. But when you see volume like this slicing through a major trend line like the 50dma or 200dma, then maybe don’t shoot all your bullets the first day. Volume was highest in FOREVER, and Monday’s volume out paces almost all previous weeks’ volumes. A lot of institutions sold and they might be slow to come back.

http://stockcharts.com/freecharts/gallery.html?sq

Look at the SHOP short crash. Day 1 was not near the end. You should have saved some powder and averaged down. Yes, after 2 months it made it a lot of the way back, but you had chances to add at low prices after things calmed down. You could also see some testing of lows in the mid 90s that might have given you confidence to make that last allocation of new money if you had not spent it the first day.

http://stockcharts.com/freecharts/gallery.html?shop

The UBNT short crash was a bit different.
http://stockcharts.com/freecharts/gallery.html?ubnt

If I recall right on that one, the short call came out and it found a bottom at $47 that same day and came back quickly, but it had already been sinking, possibly on all the short selling pressure by Citron before their announcement.
But notice it did NOT close at the bottom of its range on that big day as SQ did today. That might have been a good signal that gave you a bit more confidence in reaching for the knife. Like SHOP, 2 months late it was back near highs. If you are adding some chart reading to you bottom feeding, you like to see the major trend lines retaken and held a bit, even retested to encourage new buying.

UBNT retook the 200dma in a few days, fought with it a few days, tested the 50dma but could not go above and and then fell to test the 200dma. A nice bounce off the 200dma was, in retrospect a good time to add based on chart action. The odds become more in your favor because you can see people are not just dumping, they are bottom feeding. Maybe its like seeing the dealer has a 6 in black jack. Sure she may have a 5, giving her 11 and a chance at 21 with a forced hit, but odd are it is a 10 and she will go bust. Odds.

Look at the SHOP chart again, it also tried to break thru the 50dma on the way back up and failed. It fell and found a bottom and next time it had enough buyers to push it through, and it still looks strong.

Maybe look for some of these things before you commit all your reserved money to picking up a great deal tomorrow.

Of course, once Saul reveals what he did, we will look back in 2 months and see it was the perfect move. Midas.

P.

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Thanks Saul. I purchased shares and sold SQ puts today. I love buying opportunities which arise from unfounded rumors.

Saul,
I’ve not read Parker’s report. But I came to exactly the same conclusion with far less information. I think he’s got a short position and wants to raise money to cover his Christmas shopping. In fact, in a separate thread I even compared him to Andrew Left as you did.

Even after selling part of my position last week, I’m still very heavily invested in Square. I didn’t want to buy more but I just put in an order to buy a few calls even though I almost never trade option. Seems like easy money.

Palmer seems like a total goofball to me. The grain of truth is that part of the recent run up does seem to be related to SQ working with bitcoin. That said, I saw the announcement and yawned. This too shall pass.

It’s good to be a long-term investor.

Best,

bulwnkl

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Hi Saul,

Nice work analyzing the points of the Parker write up. I agree with you on everything except the following:

I think Bitcoin is a mania too, but I don’t see any sign that it will suddenly go away so you should sell your Square [Maybe your Nvidia]).

Sales of GPUs for Bitcoin miners is a very, very tiny portion of NVDA’s revenue. If Bitcoin were to completely vanish, it would be like a little mosquito bite to NVDA’s financials. Here’s what CEO Huang said on the last conference call (quarter ending 10/29/17):

Atif Malik

Colette, on the last call, you mentioned that crypto was $150 million in the OEM line in the July quarter. Can you quantify how much crypto was in the October quarter? And expectations in the January quarter directionally? And just longer-term, why should we think that crypto won’t impact the gaming demand in the future? If you can just talk about the steps anybody has taken with respect to having the different mode and all that?

Colette Kress

So in our results, in the OEM results, our specific crypto boards equated to about $70 million of revenue, which is the comparable to the $150 million that we saw last quarter.

Jen-Hsun Huang

Yes. Our longer term, Atif – well, first of all, thank you for that. The longer-term way to think about that is crypto is small for us but not 0. And I believe that crypto will be around for some time, kind of like today. There will be new currencies emerging, existing currencies would grow in value. The interest in mining these new emerging currency crypto algorithms that emerge are going to continue to happen. And so I think for some time, we’re going to see that crypto will be a small but not 0, small but not 0 part of our business. The – when you think about crypto in the context of our company overall, the thing to remember is that we’re the largest GPU computing company in the world.

And our overall GPU business is really sizable and we have multiple segments. And there’s data center and I’ve already talked about the five different segments within data center. There’s [indiscernible] and even that has multiple segments within it, whether it’s rendering or computed design or broadcast, in a workstation, in a laptop or in a data center, the architecture is rather different. And of course, you know that we have high performance computing, you know that we have autonomous machine business, self-driving cars and robotics.

And you know of course that we have gaming; and so these different segments are all quite large and growing. And so my sense is that as although crypto will be here to stay, it will remain small not zero.

Cryptocurrency is small for them. Specifically, last quarter it was $70M out of $2650M which is 2.6% of revenue.

Huang also said the following specifically about Bitcoin and the other emerging cryptocurrencies:

Joseph Moore

Just following up on that last question. You mentioned that some of the crypto market had moved to traditional gaming. What drives that? Is there a lack of availability of the specialized crypto product? Or is it just that there’s a preference driven for the gaming oriented crypto solutions?

Jen-Hsun Huang

Yes, Joe, I appreciate you asking that. Here’s the reason why. So what happens is when a crypto – when a currency – digital currency market becomes very large, it entices somebody to build a custom ASIC for it. And of course, Bitcoin is the perfect example of that. Bitcoin is incredibly easy to design in its specialized chip form. But then what happens is a couple of different players starts to monopolize the marketplace. As a result, it chases everybody out of the mining market and it encourages a new currency to evolve, to emerge. And the new currency, the only way to get people to mine is if it’s hard to mine, okay? You got to put some effort into it. However, you want a lot of people to try to mine it.

And so therefore, the platform that is perfect for it, the ideal platform for digital, new emerging digital currencies turns out to be a CUDA GPU. And the reason for that is because there are several hundred million NVIDIA GPUs in the marketplace. If you want to create a new cryptocurrency algorithm, optimizing for our GPUs is really quite ideal. It’s hard to do. It’s hard to do, therefore, you need a lot of computation to do it. And yet there is enough GPUs in the marketplace, it’s such an open platform that the ability for somebody to get in and start mining is very low barriers to entry.

And so that’s the cycles of these digital currencies, and that’s the reason why I say that digital currency crypto usage of GPUs, crypto usage of GPUs will be small but not 0 for some time. And it’s small because when it gets big, somebody will be able to build custom ASIC. But if somebody builds a custom ASIC, there will be a new emerging cryptocurrency. So ebbs and flows.

So there you have it. NVDA is not the best solution for mining established cryptocurrencies. GPUs are well positioned for the new, emerging cryptocurrencies.

Chris

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Of course, once Saul reveals what he did, we will look back in 2 months and see it was the perfect move. Midas.

My working theory is that Saul lived a full life. In the future. This is a second life for him in the past. Maybe like Ground Hog Day.

Cheers
Qazulight

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Saul, thanks, your calm analysis is priceless. To everyone else, be cautious grabbing a falling knife on a growth stock like this. I do like that it was caused by a “bogus” short sell argument, but IBD has also been pointing out that it was extended recently. So it was due. But when you see volume like this slicing through a major trend line like the 50dma or 200dma, then maybe don’t shoot all your bullets the first day.

Nice analysis, Puddinhead. Thanks from all of us.
Saul

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“Saul, thanks, your calm analysis is priceless. To everyone else, be cautious grabbing a falling knife on a growth stock like this. I do like that it was caused by a “bogus” short sell argument, but IBD has also been pointing out that it was extended recently. So it was due. But when you see volume like this slicing through a major trend line like the 50dma or 200dma, then maybe don’t shoot all your bullets the first day.”

From this chart the midline between bollinger bands has held on 3 prior dips. It looked like a likely place to add with powder dry should it drop to the 50 dma. I added at 41.63 and 40.65. If it gets to $35 I’ll add more.

http://stockcharts.com/h-sc/ui?s=SQ&p=D&b=5&g=0&…

Rob

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Saul, thanks, your calm analysis is priceless. To everyone else, be cautious grabbing a falling knife on a growth stock like this. I do like that it was caused by a “bogus” short sell argument, but IBD has also been pointing out that it was extended recently. So it was due. But when you see volume like this slicing through a major trend line like the 50dma or 200dma, then maybe don’t shoot all your bullets the first day.

Grrr! Yes I’m supposed to know better than this, yet added 20% to my position when SQ was only down 7%. Someone recently talked about a 3 day rule after the SHOP short attack. Wish I’d have listened. Would love to have my 20% back to use today or tomorrow.
BCTim

$30 million (!) in the final three quarters of the year — this year he’s estimating $36, $34, $36 million (!) in the same three quarters. So last year the December EBITDA was up 150% sequentially, so this year he estimates it will be up 6%!!!

I believe 36/30 is 20%.

Or 20%!!

He will evidently do, or say, or estimate, anything at all to make his short thesis sound good.

Mmmm-hmmmm. I know the type.

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Also, Saul, I note you didn’t seem to respond to my post where I corrected your math showing that 36/30m change is a 20% increase, not a 6% increase as you wrote. Makes a difference in the analysis, don’t you think?

Hi Najdorf,
I didn’t bother answering because what you were saying made no sense. I figured you just misread what I had written, and I didn’t want to embarrass you by pointing it out to you. (You see, I’m not saying “You got it all wrong, you must be a dummy”, I’m just saying you misread it, which is what I believe). I had written:

And even worse, for adjusted EBITDA, which last year went $13 million, $12 million, $30 million (!) in the final three quarters of the year — this year he’s estimating $36, $34, $36 million (!) in the same three quarters. So last year the December EBITDA was up 150% sequentially, so this year he estimates it will be up 6%!!!

As you see, you weren’t “correcting” my math, you just missed the “sequentially.” The year before EBITDA was up 150% sequentially from $12 to $30, and this year he was making a ridiculous estimate that it would only rise 6% sequentially, from $34 to $36 in the biggest quarter of the year.

Saul

47 Likes

I think he’s got a short position and wants to raise money to cover his Christmas shopping. In fact, in a separate thread I even compared him to Andrew Left as you did.

He is an analyst at a firm and for him to have a short position and then come out issue sell will be violation and will disqualify him. Andrew Left is an investor, he can short and publish his short thesis.

Your speculation is without a basis.

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Another convoluted argument. He says part of Square’s rise is tied to “the current Bitcoin mania,”

On Nov 10th the stock closed around $39.21 and on Nov 22 the stock closed at 48.81. That is 24.5% move in 8 trading days. What happened in the interim that pushed the stock up?

Square is doing a tiny experiment with Bitcoin, and none of its revenue and earnings rises have been tied to it at all

So when the investors push the valuation by 25% over a tiny experiment is okay, and an analyst questioning that is a convoluted argument?

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He is an analyst at a firm and for him to have a short position and then come out issue sell will be violation and will disqualify him. Andrew Left is an investor, he can short and publish his short thesis.

Your speculation is without a basis.

If that was true, a significant number of the Morgan Stanley and Goldman Sachs analysts would be disqualified. Primarily due to the fact that the firm they work for had major short or long positions on the stock they were covering. Full share and options ownership of analysts is rarely reported, and we cannot say with complete certainty that his speculation is without a basis.

The only difference between an analyst and Left is that an analyst is legitimized by their position, whereas Left is legitimized by his past performance and more importantly the complicity of the media in spreading his message.

Primarily due to the fact that the firm they work for had major short or long positions on the stock they were covering.

First of all there are lots of regulations to prevent such behavior. The original post equated Andrew Left with the analyst all. There is a very simple explanation, that this is a valuation call and trying to read that as a short attack is unnecessary.

I don’t see when analyst raise price targets anyone here claiming oh my god there is a long attack. So a valuation call is just a valuation call, you can agree or disagree with that but stop calling it as short attack that is pretty childish.

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His entire analysis was made public which is unlike the actions of every other analyst report from a reputable firm I’ve ever heard of. Saul made this observation and brought it to the attention of this board. His firms is obscure. I wouldn’t be so confident that Mr. Palmer is not flying under the radar, As a small potato he is probably not at great prosecutorial risk. Who would bring charges, the FEC? Which regulatory body would spend the time and energy to bring charges?

I admit, my comment was more facetious than factual (I have no evidence whatsoever) it wouldn’t surprise me a bit that it was a blatant short attack in order to raise short-term profit.

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His entire analysis was made public which is unlike the actions of every other analyst report from a reputable firm I’ve ever heard of. Saul made this observation and brought it to the attention of this board. His firms is obscure. I wouldn’t be so confident that Mr. Palmer is not flying under the radar, As a small potato he is probably not at great prosecutorial risk. Who would bring charges, the FEC? Which regulatory body would spend the time and energy to bring charges?

Routinely, I read Deutsche bank, JPM and GS research reports in Barrons, etc. Just because you conjure some thoughts in your mind, doesn’t make someone else is doing something unethical. In fact accusing people without proof is unethical. This is a routine research report on valuation basis.

From your statements it seems you don’t even understand the regulatory requirements. Every one of your point is highly speculative. I cannot imagine what kind of standards you will hold the above statements if it is made by an analyst, instead of you.

Symptoms of investors buying in late and reacting to volatility.

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Take a chill Pill.

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Kingran,
You seem to have ignored this part of my post:

I admit, my comment was more facetious than factual …

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