Editor's Note: Below is insight from Technology analyst Ami Joseph outlining his short thesis on both Dropbox (DBX) and Microchip Technology (MCHP). To read Joseph's institutional research notes email sales@hedgeye.com.
It's been quite a week for opportunistically shorting Tech stocks.
Fresh from a big win with his short ADT (ADT) call yesterday, Technology analyst Ami Joseph's short calls on Microchip Technology (MCHP) and Dropbox (DBX) are down -10% and 7% respectively today.
On Microchip Technology...
As Joseph explains in the video below, here are two key thesis points from his original short call:
- MCHP has had a series of exogenous accelerators, the current one is supposed to be MSCC, which we think bears considerable risk.
- MCHP’s M&A strategy of moving down-quality will have medium term impacts on results, ROI, and valuation.
And here's what Joseph has to say about the company this morning:
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This is the foreshadow of what happens when companies buy low quality assets and rely on exogenous factors to move the needle all around the peak of the cycle. We don’t underestimate CEO Sanghi’s ability to execute but the headwinds that the company is facing compound and sooner or later the company will need to acquire again and they will be in a worse position to do so. On the call last night, management said that the operational integration with MSCC will now be a “2-3 year project”…in our view, this acquisition is a dud and MCHP will quickly move to the next one in ~12 months to cover up the missing hole. |
ON Dropbox...
As Joseph explained here are two key thesis points from his original short call:
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Companies with accelerating factors of adoption can be beloved stocks with growth valuations. Once upon a time that was Dropbox. But not anymore. The company is squarely in the harvest part of its business lifecycle. There is nothing wrong with harvest, but the valuation / multiple range is totally different, reflecting a circumscribed market opportunity rather than an open ended one. We love Dropbox’s technology, which is the key to the 30% OCF margins, but we are bearish on the business model. |
And here's what Joseph has to say about the company this morning:
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As we have said before, the company is squarely in the harvest part of its business lifecycle. There is nothing wrong with harvest, but the valuation / multiple range is totally different, reflecting a circumscribed market opportunity rather than an open-ended one. The model of free-to-paid-to-premium users is a path with rising churn, slower underlying revenue growth, rising FCF, but falling multiples. |
