- WiseTech is a Sydney-based logistics company that’s pushed hard into tech in recent years
- The company’s share price was up more than 1000% since its IPO in 2016
- A China-based short-selling research firm has accused the company of inflating revenues and hiding performance
- WiseTech denies the allegations but its shares have fallen more than 20% in response
When Sydney-based logistics company WiseTech Global announced its FY2019 results two months ago, including a 37% increase in operating profit to AU$80.2 million, a bear market saw a golden goose.
WiseTech (ASX: WTC) had been on a rapid expansion and acquisition program, buying 15 companies in nine countries, while revenue had grown nearly four-fold in just four years, and earnings five-fold over the same period. Revenue was up a 57% to $348.3 million in FY19.
WiseTech software is now used by more than 12,000 logistics organisations in 150 countries, including the top 25 global freight forwarders.
The market lapped it up. The share price jumped nearly 10% that day to above $30. A fortnight later on September 9, it peaked at $38.80. The company was valued at more than $10 billion, a 11-fold increase in its value in a little over three years since it listed in April 2016 at $3.35.
Since the September peak, the share price has been in steady decline, but sat above $34 just a week ago. But WiseTech has gone from golden goose to sitting duck.
Analysts at Morningstar have rated WiseTech overvalued for several weeks, putting its price closer to half that level.
But overvaluations in tech are nothing new. Just ask WeWork and Uber. Or local buy now pay later fintechs such as Afterpay when UBS released an “overvalued” report last week, sending its share price, along with Zip’s, south.
Enter China-based US short-seller J Capital Research and co-founder Anne Stevenson-Yang, who released a scathing 31-page report into WiseTech last Thursday after posting this teaser on Twitter.
After doing exhaustive research, J Capital is ready to publish its findings on a company valued at more than $7 bln that we think is massively exaggerating profits and revenue.
— J Capital (@JCap_Research) October 16, 2019
Stevenson-Yang accused the company of overstating its profits by $116 million (178%), and trying to hide subsidiaries from audit scrutiny, concluding that revenues were declining. Organic growth was closer to 10% than the claimed 25%, the J Capital report said.
The short-seller’s Twitter account also swung into action, declaring: “WiseTech is a clunker. It began life in 1994 and was unspectacular for 20 years. Cobbled together through hasty acquisitions. Its core product is held in low regard by clients.”
Short-selling is a bet on a company’s share price falling. The harder it falls, the more a short-seller stands to make.
The most famous recent example was ASX-listed investment fund Blue Sky, which slid into receivership in May. While previously sitting above $14, Blue Sky shares were hammered – languishing at 18 cents at the end – following a March 2018 note from Glaucus Research explaining why it was shorting the stock, accusing Blue Sky of overestimating the value of several businesses it had under management in a $2.8 billion portfolio.
The J Capital report has wiped more than $1 billion from the wealth of WiseTech founder and CEO Richard White, although the company’s share price has a history of volatility, having fallen below $15 in the last 12 months.
WiseTech shares fell more than 10% to $30 before being placed in a trading halt that morning.
In a response to the ASX last Friday, WiseTech said the company “rejects entirely the allegations of financial impropriety and irregularity”.
Founder and CEO Richard White, said the company’s financials, revenue, profit, and growth rates were all verified comprehensively and part of annual external independent audits.
“We are very concerned that the allegations in the document may mislead and manipulate the market to the detriment of WiseTech’s business and its shareholders, large and small,” he said.
“We are deeply concerned about the extensive value destruction that can be wrought from short-seller reports that potentially damage our shareholders large and small and the integrity of investment markets.”
The four-page rebuttal said: “WiseTech rejects entirely the unfounded allegations of financial impropriety and irregularity contained in the document. In addition to the initial responses provided on allegations above, it is the Board’s opinion that the JCAP document erroneously either misunderstands, selectively presents or misrepresents the company’s performance, product quality and customer satisfaction.”
WiseTech shares returned to trade on Monday and lasted less than an hour before a second halt after falling 12.33% to A$26.30 when J Capital released a follow-up report.
J Capital says it spoke to 18 former employees, clients and competitors, and “found poorly integrated, under-performing acquisitions”. It disputed 1% customer attrition, declaring “our interviews say half of acquired customers are leaving.
“WiseTech has spent $400 million acquiring 34 companies to maintain the narrative that this is a fast-growing technology business,” the short-seller said.
There’s no doubt WiseTech’s current market cap isn’t justified by its revenues. Investors are obviously betting on continued growth from White and his team. A company worth more than 100-times earnings (and 20x revenue) is defying the laws of gravity. WiseTech became the world’s most expensive tech stock.
The fight with J Capital has some way to play out. But moral to the story of Icarus applies to share prices in a bear market too.
One man’s success story is another’s opportunity to watch it all come crashing back down to earth.