Capital Markets / Investor Relations in Two Minutes or Less
A Tale of Two Cities: WebMD Short Attack Case Study
Sometimes a short opportunity is so simple and clear, you ask yourself is this too good to be true?
In reality, the simpler the short thesis, the stronger the short attack will likely be.
Take financial guidance, the more metrics a company guides to, the more likely it will miss numbers, because management cannot control every variable.
Short attacks are the same, as the more items needed to trigger the primary irrefutable premise, the less likely the short attack actually works.
In the case of WebMD, it was the best of times and the worst of times.
The Best of Times for Shorting WebMD
A great example of a strong short attack is WebMD due to the Biopharma patent cliffs of the early 2010s.
Key Debate Facing the Company: Does management want to build an online advertising business or just exist for the next exotic convertible debt issuance it can create?
What Triggered the Short? After making comments about a revenue shortfall, management initiated a Dutch Tender offer for 6.1 million shares, or 11% of the shares outstanding for $150 million, or $26 per share.
Irrefutable Premise: A looming $100M revenue headwind and downward pressure stemming from a Dutch tender for WBMD shares at $26.
The structural problem that triggering the short were the Biopharma patent cliffs circa early 2010s.
During an earnings call in 2012, management made comments that the company would face a $100M advertising headwind due to the looming patent cliffs.
No one really paid any attention to the comment as it was several quarters prior to the comment hitting actual results
Resolution: The stock sold off hard once the Dutch tender at $26 was complete bottoming at $13
The Worst of Times Shorting WebMD
While we accurately called the bottom at $13 with our ad tracker, a significant narrative changed when the stock got into the $40s.
Digital Healthcare investors started to view WebMD as a leading technology play, or simply were hyping the company into something it never was going to be.
The part we got wrong was that either side of the aforementioned view does not represent an irrefutable premise!
Three Things to Remember
1. Narrative Driven Shorts Never Work
2. The Simpler the Irrefutable Premise the Better
3. Everything Will Come Out in the Wash
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