🐻The Bear Cave #24🐻

New Activist Reports, Trupanion in Trouble?, Tweets of the Week, and More!

Jul 27, 2020

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New Activist Reports

An anonymous slide deck on Applied Therapeutics (NASDAQ: APLT — $560 million) accused the company of “sleight of hand” in presenting clinical data. Earlier this month, Biotech Research Partners criticized Applied Therapeutics for “inconsistencies, errors and incorrect information.” The company later amended its investor deck and “announced that it has uncovered fraudulent attempts to manipulate the Applied Therapeutics stock.” Shares are down 30% this month.

Hindenburg Research published a report on Facedrive (OTC: FDVRF — $1.10 billion) titled, “Facedrive: A $1.4b ESG Stock Promotion with a Hollow Core Business, Flailing Business Pivots and Multi-Million Dollar Payments to an Opaque BVI Entity; 95% Downside.”

Wolfpack Research published a Twitter thread on Microvision, Inc. (NASDAQ: MVIS — $285 million):

Wolfpack Research @WolfpackReports

1/ We are short $MVIS because we believe the buyout rumors that have fueled its ~1,000% run over the last 3 months have absolutely no basis in reality. We see near term downside of at least 90% as insolvency looms and investors wait on a deal that isn’t coming.

Biotech Research Partners published on Apellis Pharmaceuticals (NASDAQ: APLS — $2.11 billion) and wrote, “We believe that APLS shares are highly overvalued at current prices given competitive pressures from Novartis.”

White Diamond Research published on Wrap Technologies (NASDAQ: WRTC — $371 million). The company makes a non-lethal device for law enforcement to capture criminals that White Diamond calls, “mostly impractical in the real world.” Shares are up 74% this year and the company currently trades at over 100x revenue.

Citron Research tweeted bullishly on Stamps.com (NASDAQ: STMP — $3.69 billion):

Citron Research @CitronResearch

ECOM ON FIRE. Citron believes $STMP gets acquired by $SHOP. Valuation gap has never been larger. On NTM EV/Sales, $SHOP at 44x vs. $STMP at 6x and $STMP is the proven leader in online postage... the essential tool for small biz not owned by $SHOP. All stock deal could be $400

Trupanion in Trouble?

Pet insurance company Trupanion (NASDAQ: TRUP — $1.85 billion) is up over 500% in the last five years, currently trades for over 4x revenue, and has lost money every year since its 2015 IPO. I believe rising customer acquisition costs, new competition, and questionable accounting could spell trouble for the future.

These views were articulated well in a subscribers-only report titled, “Dead Company Walking?” by Bradley Safalow of PAA Research (bradley.safalow@paaresearch.com). In his report, Safalow notes that pet acquisition costs have gone from approximately $160 in Q1 2018 to $280 in Q1 2020. This cost may increase as competition in the pet insurance market increases. For example, Lemonade, a rapidly growing and cash-burning tech insurance company, recently announced it would offer pet insurance for $12/month.

Safalow also noted that Trupanion does not seem to scale well. Despite growing revenues over 50% in the last two years, underwriting profit margins deteriorated from 6.3% in Q1 2018 to 6.1% in Q1 2020. One reason may be that as pets age, they become more and more likely to need medical treatment. As a result, as Trupanion matures it may face higher costs from covering older pets.

Mike Hacke of Steel City Capital outlined a similar short thesis for Trupanion in his Q2 investor letter. Hacke also raised accounting concerns writing, “[Trupanion is] potentially engaged in questionable accounting as it relates to its relationship with an undisclosed variable interest entity.”

In a comment letter from 2019, the SEC questioned some of Trupanion’s accounting. The SEC wrote, in part,

“Your accounts receivable at year end appear to have increased at a greater rate than your revenues...”
“Please describe for us the actuarial methods you utilize to estimate your reserve for veterinary invoices…”
“Please tell us why you removed [the] disclosure indicating that you did not believe … the reserve for claims being insufficient in an amount that would have a material impact on your reported results, financial position or liquidity.”

What to Read

“Jim Chanos: ‘We are in the golden age of fraud’” (FT)

“The Kynikos Capital Partners fund, a long/short equity strategy, has gained 22 per cent a year on average over the past 35 years — double that of the S&P 500 index.”

“Everyone’s a Day Trader Now” (WSJ)

“Robinhood appears to have been successful in its mission of democratizing investing and pulling in younger users. Investors have opened up 13 million accounts at Robinhood since its founding. Their median age is 31, the company said.”

“The Bizarre Fall of the CEO of Coach and Kate Spade’s Parent Company” (ProPublica)

“One of only five Black chiefs of a Fortune 500 company abruptly resigned after strange allegations — involving a hidden identity as photographer and an extramarital affair — resurfaced.”