A short-seller's report can spell disaster for a stock, especially when it is first released. Questions and doubts can arise about the underlying business, and whether it's a safe stock to own. In many cases, investors head for the exits and sell rather than hold on and wait to see if the claims are true.
Hindenburg Research is a notable short-seller and it recently released a scathing report on Super Micro Computer. (Short-sellers make money when a stock falls, so investors reading their reports always need to keep that bias in mind.) The company provides businesses with servers and crucial IT infrastructure that has been in hot demand in recent quarters amid the growing excitement surrounding artificial intelligence (AI). And that has allowed its stock to generate significant returns along the way. Unfortunately, the short report has created a cloud of uncertainty around the business and has made investors think twice about buying shares of the tech company.
Short-seller reports can, however, be biased and misleading, and making hasty decisions based on them can prove costly for investors. This is by no means the first time Hindenburg has targeted a high-profile stock. Below, I'll look at some of the more notable reports it has issued in the past couple of years, and see how the stocks have performed since then.
Clover Health
In 2021, Hindenburg released a report bashing Clover Health Investments(NASDAQ: CLOV), a special purpose acquisition corporation (SPAC) that went public earlier in the year. SPACs have gotten a bad rap in recent years as being risky investments, and Hindenburg wasted no time in going after the company, alleging at the time that the Department of Justice (DOJ) was investigating Clover Health. Last year, the company did end up settling lawsuits related to misleading investors. Clover Health admitted that the DOJ did make inquiries about its business but that they were not out of the ordinary, and that it wasn't required to disclose them to investors.
Since the short-seller report came out in February 2021, the healthcare stock has crashed by approximately 80%. But it's likely the stock would have crumbled with or without the short-seller report. SPACs have generally struggled in recent years as their sky-high expectations have failed to materialize.
Clover Health was risky back in 2021 and it remains that way today; in the trailing 12 months, the Medicare Advantage provider has incurred losses totaling $123.7 million. Its incredibly thin gross profit margin of 15% will make it difficult for the company to turn a profit on a consistent basis.
DraftKings
In the era of meme stocks and risky investments in 2021, Hindenburg went after another big-name SPAC, DraftKings (NASDAQ: DKNG). The gambling company represents an intriguing growth stock as many states have been legalizing gambling in recent years. Hindenburg, however, alleged that by merging with SBTech through the SPAC, DraftKings was getting involved with a gaming technology company that had a track record for operating in black markets where gambling was illegal (estimating that as much as half of SBTech's revenue came from such markets).
The claims weren't proven in court and DraftKings would end up winning a class action lawsuit which investors had brought against the company related to Hindenburg's allegations. The judge didn't see much grounds for the suit as it was based primarily on the Hindenburg report, which relied heavily on anonymous sources.
The report came out in June 2021 and shares of DraftKings have fallen around 30% since then. For the most part, however, investors appear to have moved past the negative press as nothing significant has materialized from the short-seller's claims; the stock has rallied 16% in the past 12 months. A spokesperson from DraftKings stated that the report was biased and that the company did not see any issues when completing its merger with SBTech. "We conducted a thorough review of their business practices and we were comfortable with the findings."
DraftKings has been generating good growth numbers but it remains a risky buy as it still struggles with profitability. The positive, however, is that the company cut its operating loss in half last quarter to $32.4 million while growing its top line by 26% to $1.1 billion. It is one of the more popular gambling stocks to buy, but investors should tread carefully with it as it still has a long way to go in being a safe investment.
Block
Last year, Hindenburg went after Block (NYSE: SQ), alleging that the payments company "inflated user metrics" and that "criminal activity and fraud ran rampant on its platform." Block responded, saying that the findings were "inaccurate and misleading," stating that it routinely checks for fraud and illicit activity and estimated that just 2.4% of its Cash App transactions in 2022 had to be blocked by its compliance teams. While there was an initial drop in the stock following the short-seller report, shares of Block would end up recovering and they have risen by around 7% since then. This recent short report against Block isn't all that old, but there haven't been any developments to suggest that its claims are true.
The bigger problems facing the company today are arguably an influx of competing payment options for consumers, which could limit Block's growth opportunities, plus its exposure to Bitcoin. Bitcoin-related revenue makes up more than 42% of its top line but the gross profit margin is minimal (less than 3%), making it a questionable and highly speculative area to focus on. Block's focus on Bitcoin makes it a risky stock to own, one that's likely going to be mainly attractive to crypto investors.
Investors should take short reports with a grain of salt
Short-sellers can earn considerable profits if a stock they have a short position in falls in value. Investors should always keep this in mind with any short report, as the authors could stand to benefit significantly from a sell-off. Short reports are also often biased and present limited views of the business. The claims can seem disastrous for a business but they may not necessarily be true (and often aren't).
Shares of Super Micro Computer are down more than 20% since the release of the short report. There could be more headwinds for the stock as investors have been a bit more bearish of late on AI stocks, but overall, investors shouldn't expect the short report to weigh on the stock in the long run. Ultimately, how it performs will come down to how well the company is able to continue to grow its top and bottom lines.
In the end, investors should always do their own analysis and have their own reasons for investing in a stock, which goes beyond just a single report -- regardless of whether it is good or not.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin and Block. The Motley Fool has a disclosure policy.
