What is a Fair Value for a Public Company?
Simple question, but difficult to answer.
The trivial answer is: “The Market” determines the Fair Value. But how can the value of something vary so greatly (i.e. multiply by 10x and then decrease again to 1x)? You would think that the triggers for such change can be identified.
Method: Relative Value – Compare to something else
The chart below compares the Sinch stock (red) with the main competitor Twilio (purple) and the Nasdaq Composite (yellow). The period is March 1, 2021 until end of Nov 2022.
Between March 2021 and Nov 2021, Sinch was fluctuating strongly, but outperformed the Nasdaq Composite and Twilio. In Q4/2021, all tech stock started to decline: NASDAQ from the peak of 120% of the March 2021 value to 80%, Twilio without a peak down to under 20%, and Sinch from a peak at almost 140% down to 20%, with a low even around 10%.
The reasons for the decline of all tech stock (typically by 20% to 50%) are quite clear and related to the macro economy (Ukraine war, inflation, increasing interest rates, worries about recession, etc).
But Twilio and Sinch (leaders in the CPaas market) declined a lot more, which might be a negative indication about this segment (and probably also a correction of too much growth and optimism in the period before).
So, there are several interesting areas to analyze:
- CPaaS market: growth potential, profitability, risks, etc
- Direct comparison Twilio – Sinch
- Specific triggers that caused the extreme decline
Sinch Timeline with Relevant Events
But let’s first establish a timeline for the past 1-2 years and then put some major trigger events into this timeline.
The classic events are the
- Quarterly reports from the Company
- Important press releases from the Company
- Impactful external events that relate to the Company
So, what can we see in this chart?
- The Q2/21 report from July 2021 had a positive impact on the Sinch stock and led to an all-time high of over 200 SEK per share
- From this peak at the beginning of Sep 2021 until mid February 2022 (less than 6 months!), the stock lost almost 65%.
- The reports for Q3/21 and Q4/21 were not positive for Sinch.
- Interestingly, the stock dropped significantly in the 1-2 weeks BEFORE the respective company announcements.
- In this 6 months period with massive stock drop, Sinch announced 3 major acquisitions with a total purchase cost of about €4 billion, more than Sinch’s overall value today in Nov 2022. Sounds like “The Market” did not like those acquisitions and this certainly is worth more (future) analysis.
- This situation attracted more and more short sellers and Sinch became a very highly shorted stock (more than 15% of Sinch’s value was shorted – an unusually high number).
- The trade volume substantially increased between Feb 2022 and July 2022. And then multiplied again for the following months.
- The absolute low point was reached in July 2022, when Sinch was preparing for the Q2/22 report. Several things then happened in short sequence, maybe the worst moment in the company history:
- On July 11, an Anonymous Short Seller Liar (ASS Liar) published a 25-page “research report” full with accusations against Sinch (without any proof and fully rejected by Sinch in a detailed response a few days later)
- Later the same day, Sinch issued a press release stating that they had to re-assess historical COGS with a negative impact on profit of SEK 162 million (about €16 million).
- Sinch stated that the anonymous research had caused them to accelerate the COGS announcement, but that the (unjustified) accusations and the COGS issue were unrelated. Of course this confused the market a lot, but keeping this COGS skeleton in the closet for a few more days would also not have been helpful for Sinch’s credibility.
- On July 20, Sinch announced the search for a new CEO.
- On July 21, the quarterly report for Q2/22 was published and Sinch published a detailed response to the ASS Liar accusations, rejecting them all.
- Short Seller Explosion
- Between the Q4/21 and Q1/22 reports, there were 2 short sellers registered with more than 0.5% stake each in Sinch.
- Between the Q1/22 and Q2/22 reports, there were at least 8 short sellers with 0.5% ownership each and many more below the 0.5% threshold (the “visible ones” only held about 50% of the overall “short”)
- With the disastrous events listed above, the number increased further and the trading volume jumped up; some short sellers increased their individual stake to almost 2%
- The absolute low point was reached in end of Sep 2022, when Sinch was valued at around €1.5 billion (down more than 90% of its peak valuation).
- A press release on Sep 29 announced that Sinch’s founders purchased 5% of company stock from Softbank, who had invested about €0.8 billion in 2020/21 for about 10% of Sinch stock, and who had sold off in 2022 the first 5% of that, at huge losses. I will analyze that more, but a quick estimate is that Softbank lost more than €500 million and by selling 5% of Sinch stock on the market, put extreme continuous pressure on the stock price.
- Since end of Sep 2022, Sinch stock recovered from a low of under 15 SEK to currently about 35 SEK, still 85% below its high.
So, what is the Conclusion?
- The overall market sentiment got a lot worse in the past 12 months
- CPaaS leaders Sinch and Twilio lost a lot more than the tech average: that is worth some more detailed analysis. Are concerns about the CPaaS market valid? What are the main assumptions, opportunities, and risks? How can CPaaS player diversify from a volume business with low profit margins towards a higher-value model?
- The Short Seller Bear Raid on Sinch in 2022 is worth more detailed analysis: who were these short sellers, how much did they engage, what was their timing, what is their current success status, did a first squeeze already happen, will there be more squeeze or will they get out smoothly with some profits?
- What role play the analysts who mostly rated Sinch as “Buy” when the Company was already over the peak and rated them as a “Sell” when it was already recovering from its low? How can they be SO WRONG? What are their prediction and valuation models and why are they not matching with reality? Are there obious key assumptions they have wrong or do they just extrapolate the recent past and wrap this is sophisticated number clouds ?
- How strong is the impact of “strategic investors” like Softbank whose entry gets celebrated as a “quality certificate” for the Company, whose exit accelerates the stock price decline (and causes themselves 100s of millions Euros of losses). Are they (maybe) not so smart and are they more an instability risk than a quality signal?
- How comes that obvious lies from the ASS Liar can initiate a rapid stock decrease of almost 50%? Why do analysts quote them in their reports and refer to them as “Research” ? Why do reputable finance media refer to them and put pressure on the Company? What does it mean, if obvious self-serving lies are tolerated in the finance world (and we have seen in the past 10 years how top politicians in various countries invent their own realities with systematic lies)?
- And getting back to the start: what is a fair valuation for a Company when all these forces and influences are at play, in a dangerous mix of greed, lies, incompetency, and randomness?