Oatly fell 6.1% to an all-time low of $19.40 Wednesday as short seller Spruce Point Capital Management accused the oat milk company of misleading investors on multiple fronts and overstating its revenue.
In a report published Wednesday, Spruce Point Capital Management said there is a long-term potential Oatly faces insolvency.
“While investors are enamored with its sales growth in the plant-based food fad, and its commitment to ESG practices, we believe they should be focused on its loss of market share in Sweden and the U.S., minimal barriers to entry, lack of competitive advantages, rising commodity input costs, and supply challenges created partly through poorly planned production facilities,” Spruce Point said. “As such, we believe Oatly will sorely disappoint investors and will never achieve profitability.”
The short seller accused Oatly of shady accounting practices, claiming that the oat milk company has overstated its revenue and gross margin by 640 basis points. Spruce Point warned investors that Oatly has churned through three auditors in six years, and its CFO and audit chair were both involved in prior corporate accounting scandals.
In addition, Spruce Point said Oatly’s nearly $12 billion valuation is unsustainable and will only hurt new investors.
“Oatly’s valuation has mysteriously ballooned nearly 6x since a $200m investment by Blackstone in July 2020 despite our evidence pointing to market share loss. Oatly is trading at 17x ’21E sales and 75x adjusted gross profit and a $12bn valuation (57% of the 2025 total projected non-dairy milk market),” the short seller said.
Spruce Point is calling for Oatly’s board to hire an independent forensic accountant to open an investigation the short seller’s claims.
The short seller also blasted Oatly’s ESG commitment, specifically the company’s claims that its conversion from cow’s milk to oat milk results in 80% fewer carbon emissions, 79% less land usage, and 60% less energy usage.
Oatly emphasized the claims on one of its first slides in its June investor presentation, but the data was from a 2013 study that didn’t account for Oatly’s recent expansion into the US and Asia.
“In addition, we believe Oatly has “cherry-picked” the study’s results by failing to show that its impact on water consumption is worse than dairy milk,” said the short seller. “Through a FOIA request, we learned that Oatly’s production process also generates dangerous volumes of wastewater that requires it to build its own treatment facilities.”
Short seller Hindenburg Research revealed its latest short position against DraftKings in a report on Tuesday.
Hindenburg said that one of DraftKings’ SPAC merger partners, Bulgaria-based gaming technology company SBTech, “brings exposure to extensive dealings in black-market gaming, money laundering, and organized crime.”
The short seller claimed that, according to their estimates based on SEC filings, “supporting documents,” and conversations with former employees, roughly 50% of SBTech’s revenue comes from markets where gambling is banned.
DraftKings did not immediately respond to Insider’s request for comment about the report.
Hindenburg said the company’s illicit customer relationships were shuffled into a newly formed “distributor” entity called BTi/CoreTech when DraftKings went public via a SPAC merger with Diamond Eagle Acquisition Corp. in April 2020.
The short seller has been a frequent critic of popular startups, many of which have gone public via SPAC. Previous targets include electric vehicle makers Nikola and Lordstown Motors, as well as Chamath Palihapitiya-backed Clover Health.
Hindenburg also noted that DraftKings insiders have dumped over $1.4 billion in stock since the company went public, and SBTech’s founder personally sold around $568 million in shares.
Finally, the short seller argued DraftKings’ business model of aggressively spending cash to acquire customers that may or may not be loyal to the platform could be a risk moving forward.
DraftKings stock traded down 7.80% as of 9:47 a.m. ET after news of the short-seller report broke.
Using leverage, or borrowing money to buy stocks, can pay off for retail investors participating in the explosive rallies in AMC Entertainment, GameStop and other so-called meme stocks but they need to be aware that those trades can quickly turn and burn them financially, the ex-head of TD Ameritrade said in a CNBC interview on Thursday.
“My biggest concern is what’s going on with the individual investor … and that they’ve got to be able to understand when they use leverage what that really means,” Joe Moglia, a former CEO and chairman of the online discount brokerage, told CNBC’s “Squawk Box”.
In using leverage, or margin trading, investors borrow cash from their brokerage companies to buy stocks and pledge securities in their accounts as collateral. Margin trading increases buying power and expands profits.
“Leverage on the way up is a great thing. Leverage on the way down can rip your arms off,” Moglia said, referring to losses that can hit investors when a stock price falls. He said investing platforms and other market professionals need to improve upon educating individual investors who day trade about the risks they face from market declines and how to handle them.
“A quick example: if you bought AMC at $10, and it goes to $20, is that not enough of a profit? It goes to $30, it goes to $40. At what time do you start to trim that position or, in effect, get rid of the position altogether? There are things that we’ve got to do a better job of with day traders,” said Moglia, who is the current chair of FG New America, a blank-check company, or SPAC, that targets opportunities in the fintech industry.
Moglia spoke as retail investors have launched AMC’s price up by more than 500% since late May in defending the movie-theater chain’s shares against hedge funds selling the stock short. The rally is reminiscent of the January boom in GameStop’s price as retail investors battled hedge funds betting against the video-game retailer’s stock. GameStop shares eventually retreated sharply from an all-time high of $483 apiece.
Investors can be vulnerable when the value of the stocks they’ve purchased drops significantly. Those declines can trigger margin calls, or demands by brokers for clients to repay some of the money they borrowed. Brokers can liquidate a client’s assets to cover the debt if they fail to meet a margin call.
Retail investors have lately overpowered short-sellers betting against AMC. Short-sellers lost nearly $3 billion on Wednesday alone as AMC’s share price more than doubled, according to data from analytics firm Ortex.
“What we’ve got to be conscious of is, at some point, the market is going to turn around. The technicals are going to wear out and [retail investors have] got to be prepared for a down move in that. But so far, I think they’ve pry made a little bit of money,” Moglia said.
Retail trading volumes, meanwhile, have been climbing on the back of growth in commission-free brokerage accounts and user-friendly trading apps and as millions of Americans forced to stay home because of COVID-19 turned to the stock market to make money.
Moglia said retail day traders overall should learn more about long-term investing strategies which can enhance discipline.
“If they love what they’re doing and they get burned a bit, that shouldn’t send them away from the market although I recognize that’s a risk. That should tell them they need a better education, a better understanding that day-trading alone is not going to be good enough to ride out the ups and downs of what’s going on with the economy and the markets over the next several years.”
The report, titled “A pump and dump SPAC scam by silicon valley celebrities, that makes Theranos look like amateurs,” say that QuantumScape’s technical claims on its highly guarded battery technology are misleading, exaggerated, or fraudulent.
The report is based off of interviews with former QuantumScape employees, as well as battery experts and current Volkswagen employees that are focused on the auto company’s electric vehicle battery efforts.
QuantumScape is working to make a scalable solid-state battery that would promise quicker charging times, longer range, and lower costs for electric vehicles, relative to today’s lithium-ion batteries.
“Our research indicates that QuantumScape can’t even reliably make test cells that work,” the report said, adding that “red flags around scaling and manufacturability render QuantumScape’s cells a pipe dream.”
SPAC IPOs have been all the rage since the COVID-19 pandemic began, and the trend has only accelerated in 2021. Now short-sellers are beginning to take notice.
The group of investors has tripled bearish bets against SPACs to $2.7 billion, from $724 million at the start of the year, according to data from S3 Partners first reported by The Wall Street Journal.
Short-sellers have a lot of SPACs to sift through, given that the $166 billion raised by SPACs in the first quarter of 2021 exceeds all of the SPAC deals formed in 2020. But high-profile short-sellers seem to be having no problem finding their targets.
Muddy Water’s Carson Block released a report earlier this month on XL Fleet, a recent SPAC IPO that, according to Block, misled investors on an inflated revenue backlog for its retrofitted hybrid vehicles. The share price of XL Fleet has yet to recover from Block’s short report.
Short-seller firm Hindenburg Research, which rose to fame last year after it released a damaging short-report on Nikola, has also had success targeting SPAC firms. Hindenburg released a report on Lordstown Motors last week, alleging that the SPAC-merged company has “no revenue and no sellable product.” Shares of Lordstown dipped more than 20% and have yet to recover from the decline.
Even the SPACs led by billionaire investor Chamath Palihapitiya have been unable to avoid the scrutiny of short-sellers. Palihapitiya’s recent Social Capital SPAC merger with fintech firm SoFi has more than 20% of its share float sold short, according to data from Finviz.
Besides the underlying business concerns raised by short-sellers for SPACs, underlying trends in interest rates could be helping their bets against SPAC mergers. A majority of the companies going public via SPAC merger are not profitable, and don’t forecast profitability until years down the road.
The dearth of profits hasn’t jived well with investors as interest rates have risen over the past few months, sparking a rotation out of high-tech growth companies and into cyclical stocks in the energy and financial sectors.
Hello and welcome to Insider Investing. I’m Joe Ciolli, and I’m here to guide you through what’s been happening in markets, as well as what to expect in the coming weeks. This week is packed with all the GameStop and Reddit content you could ever ask for.
If you’re reading this, that means you managed to make it through the stock market’s most absurb week in recent memory. You’ll always remember where you were when Reddit day traders banded together and pumped 90’s nostalgia stocks like GameStop to the moon – an unprecedented uprising that sent ripples through every layer of the financial system.
The story starts, of course, with the traders themselves, who conduct their business on r/WallStreetBets subreddit. They threw the exact perfect mix of market savvy, anti-establishment sentiment, and sheer will into a blender and came out with a destabilizing cocktail that left established Wall Streeters scrambling clean up the mess.
The central concept was relatively simple: focus on buying heavily shorted stocks, which will hopefully squeeze those positions until they’re forced to close, pushing the stock up even further. Ideally that inspires people that feel left out to pile in. Rinse, repeat. That these companies – which included Nokia, BlackBerry, and BB Liquidating (formerly known as Blockbuster) – were nostalgic, past-their-prime businesses was an added bonus to the Reddit crowd, who are never ones to pass up a chance at irony.
But the phenomenon goes far deeper than that. Underlying the memes and the hubris rests an anti-establishment streak. For a portion of the WallStreetBets crowd, this undertaking isn’t just about making money. It’s about making Old Wall Street pay, and the group isn’t exactly being coy about that fact. “It seems Occupy Wall Street had the wrong approach,” the official WallStreetBets Twitter account posted on January 26.
So what’s the damage look like on Wall Street so far? Arguably the biggest casualty has been Melvin Capital, which held a short position on GameStop that’s left them down 53% year-to-date – performance so bad that investing titans Steve Cohen and Ken Griffin have had to bail them out.
Then there’s also the matter of the preferred trading platform for the Reddit army: Robinhood. The online brokerage had a week for the ages after restricting further buying of GameStop, then backtracking after backlash from everyone from AOC to Chamath Palihapitiya. There have also been reports that Robinhood was forced to draw on bank credit lines amid the madness. How this impacts the company’s quest to go public this year will be a story to watch in the coming weeks.
So where do we go from here? One thing to watch is how hedge funds react. They were already shedding equity exposure in the early days of the GameStop craze, and it’s possible the market dislocations exploited by Redditors will cause them to retreat further.
Many other questions remain. Who else was caught short and ultimately doomed by WallStreetBets? Who else raked in big returns like Silver Lake? When will the so-called meme stocks come plunging back down to earth? And will the stock market ever be the same? Keep watching this space to find out the answer to those, plus many more.
Join us Tuesday, February 2, 2021 at 1:00 p.m ET as deputy editor Joe Ciolli, markets and economy reporter Ben Winck, and senior investing reporter Vicky Huang discuss the GameStop phenomenon, the influence of WallStreetBets, and how the Reddit-fueled trade might end.
Join Insider on Wednesday, February 3 at 2:30 p.m. ET as Insider’s chief finance correspondent Dakin Campbell moderates a panel featuring Kim Posnett, Goldman Sachs partner and Internet investment banking chief, Greg Rodgers, a Latham & Watkins LLP attorney and direct-listings expert, and Mitchell Green, a venture capitalist at Lead Edge Capital who backed Uber, Spotify, Asana, and Alibaba.
These IPO experts will discuss what you can expect for the year ahead and how the recent changes have dramatically altered the calculus for startup entrepreneurs. They will also take reader questions.
Wall Street hedge funds are scrambling, and it’s all because of a online investing forum that has more than 4 million members who self-describe themselves as “degenerates.”
Reddit’s WallStreetBets forum has surged in popularity after retail investors within the group successfully staged a gravity-defying short-squeeze in GameStop at the expense of hedge funds that were betting the physical video-game retailer was on its last legs.
A short-squeeze occurs when investors who are betting against the stock are forced to close out their position by buying the stock, further adding fuel to the fire.
As of Thursday morning, GameStop had a year-to-date gain of more than 2,400%. The rally in GameStop crushed Melvin Capital, a roughly $12 billion hedge fund that has suffered a more than 30% decline due to its short position in GameStop.
“They [retail investors] are proving to be quite capable of mounting some successful ‘value capture’ against Wall Street institutional investors,” Fundstrat’s Tom Lee said in a note on Monday, adding that “large size does not always win.”
But the influence of WallStreetBets on stock moves could wane in the future as systematic funds “adjust” their models to incorporate this new source of volatility, Lee said.
And it’s not only quant funds that could put a dent in the influence of 4 million Reddit traders, it’s also trading platforms.
On Thursday, Robinhood restricted buy trades in a handful of stocks that have seen epic short squeezes and have been targeted by the Reddit group, including GameStop, AMC Entertainment, and Nokia, among others.
Now the question is, according to Lee: “Will their strategies endure?”
Investors betting against Tesla lost billions last year, as the automaker’s shares leaped above nearly all estimates.
Short sellers saw $38 billion in mark-to-market losses throughout 2020, Bloomberg reported Thursday, citing data from S3 Partners. Short interest in the shares fell to less than 6% of Tesla’s float from nearly 20% as the company’s rally led investors to close out their bearish positions.
Tesla bears lost more than any other group of short-sellers in 2020. Those betting against Apple saw the second-largest deficit of nearly $7 billion, according to Bloomberg.
The hefty losses are up sharply from the previous year’s total. Bearish investors lost $2.9 billion in 2019 as Tesla jumped nearly 70% from its June low into the end of December.
Short-selling a stock involves selling borrowed shares and buying them at a lower price. Investors shorting a stock profit from a drop in price.
Tesla shares gained 743% in 2020, boosted by steady profitability, newly bullish analyst outlooks, and outsized demand from retail investors. The rally pushed CEO Elon Musk’s net worth to $158 billion in December and established him as the world’s second-wealthiest person – after Amazon CEO Jeff Bezos.
The stock most recently charged higher upon inclusion in the S&P 500 index. News of Tesla on the S&P lifted shares in mid-November. Soon afterward, Goldman Sachs analysts noted that institutional investors tracking the index could fuel Tesla’s next leg higher as they look to match the benchmark’s weight.
Musk has repeatedly squared off with short sellers on social media. The chief executive’s latest mockery of the group came in July when he sold red shorts featuring the company’s logo. The “short shorts” – marketed as a sardonic rebuke to the company’s short-sellers – proved so popular on their launch day that Tesla’s merchandise website crashed.
Tesla closed at $705.67 per share on Thursday. The company has 20 “buy” ratings, 44 “hold” ratings, and 19 “sell” ratings from analysts.
Now read more markets coverage from Markets Insider and Business Insider: