It is no fun being a short seller in a bull market. Most of Citron Research’s recent calls have been beaten by the technology boom. Nvidia would fall to $90 per share, Citron said at the end of last year. It is now double that. Citron switched to Mobileye, another chip company with a high multiple, which it said would slip to $35. A fortnight later, Intel bought Mobileye for $63 a share.
The latest call from Citron’s Andrew Left looks more promising. Ubiquiti Networks’ shares fell 8 per cent after Citron called the $4bn networking hardware company a “total fraud”. Ubiquiti declined to comment. On Twitter, chief executive Robert Pera, who owns 70 per cent of the company, said he would not respond to “stock manipulators”.
The meat of the allegations centres on earnings, which Citron argues are too good to be true. Ubiquiti reports an operating margin of 34 per cent compared with an average of 8 per cent among 14 peers. Ubiquiti claims to spend less on marketing and on research and development costs by having small teams in low-cost places.
Mr Left queries why the company has been without a chief financial officer since April 2015. Mr Pera did address this on Monday, in a less than ideal way: CFOs are too prone to sucking up to investors, he said.
Other allegations are weaker. Citron argues that Ubiquiti has waved a red flag in conference calls by saying its business is “misunderstood” by the market. Sure, Enron used that language. But it has also been used in the past couple of months alone by dozens of companies. Mr Pera is due to give a presentation next week where he should explain the company’s nuts and bolts better.
Citron can point to no smoking gun. The main worry for investors should be that the company is fighting against bigger competitors in increasingly commoditised markets — WiFi mesh systems for the home, for example — while betting on risky new products such as wearable cameras. Even if Citron’s reasoning is wrong, this call may not be another lemon.
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