JAKE MERL: Welcome to Trade Ideas.
I'm Jake Merl, sitting down with John Jannarone,
Editor in Chief of IPO Edge.
John, great to be back on the show.
JOHN JANNARONE: Thanks, Jake.
JAKE MERL: So I usually don't really
say this at all to our guests, but your past few trades
on our show absolutely crushed it.
I mean, you were just here about a month or so ago.
And I don't mean to cherry pick, because we
do review both the winners and the losers.
But I mean, you really do deserve a little victory lap
here.
JOHN JANNARONE: Thank you.
JAKE MERL: You were last here about six weeks ago,
in April, discussing the bear case for Lyft.
You said the stock would drop to $50 a share
due to overvaluation, insurance issues, the employee contractor
situation, and a whole host of other different reasons.
The stock dropped like a stone immediately
after your interview and hit your target.
Can you please briefly review your bear thesis
on Lyft and why you recommended going short?
JOHN JANNARONE: Sure, Jake.
So, I think that the biggest argument against Lyft
was the fact that these rides are a commodity
and the margins are very, very narrow.
And as a result of that, the odds
of them making money anytime soon are super slim.
I mean, if you recall, I was talking about
even the bullish analysts expecting EBITDA to go
positive only maybe 2023 or so.
It's just hard to pay five or six times sales for that.
But the other piece of it that I did discuss, you mentioned,
is the insurance liability.
These guys carry so much of that on their books.
And it's really hard to analyze that.
I mean, we're trying to talk about a tech company here,
not an insurance company.
So I thought there was a little bit puzzling
and another reason to give pause.
JAKE MERL: But why did the drop happen so quickly?
I mean, even you weren't expecting
it to happen so quickly.
JOHN JANNARONE: No, I wasn't.
I mean, I was thinking that was more of a year-end target.
To be honest, I think something technical may have gone on.
So, I've since looked into that.
And as we all know, shortly after Lyft went public,
Uber came on.
And there's a good possibility that a lot
of those Uber shareholders, who are not
allowed to sell their stock or hedge, by law, we're looking
for creative ways to do it.
And what we saw was the percentage of shares
outstanding, or the float that was borrowed,
shot up to over 60% in Lyft.
And the explanation for that could
be that there are a lot of Uber investors, perhaps employees,
who shorted Lyft very, very aggressively, in place
of getting out of their Uber stock.
And to this day, the percentage of float that's borrowed
is nearly 70%.
JAKE MERL: And so is that speculative at all, John?
Or do you actually know for a fact
that Uber shareholders went out and shorted Lyft?
JOHN JANNARONE: No, I mean, it is speculation.
But I think it really stands to reason.
I mean, I was looking into all kinds of things
that were going on with Uber.
Another thing that was interesting
is that there were plenty of shareholders
who couldn't sell in the IPO itself,
but were trying to sell in the secondary market
right around the same time.
So, we all talked about 11% of the shares
being sold in the IPO.
But by some estimates, it was more like a quarter
of the outstanding stock that was available if you
include the secondary market.
So given that, I think if you start to connect the dots,
it makes sense that a lot of that short selling in Lyft,
even if you don't like the company,
for it to be sold that aggressively,
when the borrow is that expensive,
and we're talking about 30% plus annually,
it all points to Uber.
JAKE MERL: So, given the massive increase in the short interest,
would you still be looking to go short Lyft here,
or would you be taking profits on your trade?
JOHN JANNARONE: Well, I still think,
if you go back to my original thesis, which
was based as much as I could on fundamentals--
I mean, even though this company doesn't have any profits,
if you look at a reasonable sales multiple, I said $50.
We got here fast.
I think it's probably time to take your money off the table.
I mean, I think the real cash has already been made.
Now, another thing that you've got to wonder about here
is could there be a short squeeze?
And that gets back to this whole issue
of those Uber shareholders.
My bet is that if they see the stock start to creep up,
and it looks like there's going to be a squeeze,
they're not going to run away from this thing
like you might see a lot of short sellers would.
So, I would say that any squeeze might be mollified by that.
JAKE MERL: So you actually recommend just staying
away from the stock right now.
JOHN JANNARONE: Yeah, I mean I hate to recommend a hold here,
but I think it's OK to take profits.
JAKE MERL: So shifting gears to the second trade
you had last time, you had a bullish bet
on this particular SPAC, Thunder Bridge,
and you recommended playing it through the warrants.
You suggested buying them around $0.80 or so, and they actually
doubled to over $1.60 just within a few weeks from
your interview.
Can you please briefly review what a SPAC actually
is, and then your main thesis on Thunder Bridge?
JOHN JANNARONE: Yeah, definitely.
So a SPAC is a Special Purpose Acquisition Company.
In this case, what the company did
was raise cash, identified a target,
and it happened to be this company called Repay.
And what they do, it's a fintech company,
so they make it a lot easier to repay
auto loans, personal loans, stuff like that.
So every time these are issued, they
have these warrants attached.
And that's an incentive for hedge funds and other investors
to buy the SPAC before they know what the target is.
It's obviously a risky thing, because the warrants
can expire worthless.
They're far out of the money.
But what happened here was that these guys found
some other investors, some very prominent investors, in fact--
Neuberger Berman, Baron--
Baron's a big long-only fund-- and they came in
before the deal was actually closed.
And the guys got together and said,
we don't want this dilution from these warrants,
so let's call them.
So this is something that was pretty much unheard of.
And I would never have expected this to happen so soon.
But it did.
So effectively, what happened is all those warrants are going
to be taken out for $1.50 in cash,
plus a quarter of a warrant.
So they're not exactly called.
It's a variation on it.
So since the private placement was announced,
I actually think this has become a more attractive opportunity.
Here's why-- they're going to be called for $1.50 in cash,
plus you get to keep one quarter warrant per previous warrant.
So, the math that you would do there is,
you subtract out the $1.50 from the $1.65, and that's $0.15.
So if it's a quarter warrant for $0.15,
you would multiply it by four to make
an estimate of what the valuation would
be for a whole share.
So that's about $0.60.
Now, like you said, before this happened,
they were trading at $0.80.
So what I see here is an opportunity
to own the warrant piece for less than it was
before this deal was announced.
But clearly, the situation's gotten more attractive.
You've gotten Neuberger, you've got Baron.
And they just reported a good quarter.
They announced a very experienced director
is going on the board, who was on the board of MasterCard.
So if I were in this, I would absolutely hang on.
I mean, it looks hard to do.
I mean, it's very tempting to take profits after a 115%
jump or something like that.
But believe it or not, I think the situation
is even more attractive.
JAKE MERL: So just to break that down a little bit more,
you're actually saying that even though the warrant doubled
in price, it's actually cheaper than it was last time.
JOHN JANNARONE: Well, yeah, so the idea is that $1.50 of that
$1.65 is just cash.
It can't move.
I mean, it would be ridiculous for it
to trade any less than that.
I mean, there is a possibility the deal doesn't happen.
But that looks extremely unlikely,
now that you've got these other investors coming in.
So I would say, if you put a near 100% probability
in the deal happening, you got $1.50 there.
The remaining $0.15 is what the warrant's worth.
And if you go back to before the deal,
the warrant was trading at the equivalent of $0.80.
But multiply the 15 by 4, it's like $0.60.
So I know there are a lot of moving pieces here,
but I think that what might be happening
is that there are people who made a lot of money
on the warrants and are taking profit.
But it could be an opportunity if you look at a more
carefully.
JAKE MERL: So how much more upside do you actually
see for the warrants?
JOHN JANNARONE: Well, I think that this is--
initially, I said that they could double.
And I think that now--
I mean, I wouldn't be--
I mean, that could happen over time.
But what I think what I was thinking then was $0.80,
another $0.80 upside.
So, let's say there's another $0.80 upside in the next couple
of years.
JAKE MERL: So would you recommend new traders get
involved with this position now, or you just
recommend holding on if you already had a position.
JOHN JANNARONE: I think either way.
I mean, what I believe is happening
is that there are some people who are trying to not
be greedy, because they see that they just got a home run,
they got taken out.
It's probably a bunch of hedge funds
who bought this in the IPO.
And they want to sell a winner.
And I would absolutely think this is a good place
to get in as a new investment.
If you want exposure to that-- and remember,
it's not that liquid compared to the stock.
But if you want to take a new position,
I think it's really interesting.
JAKE MERL: And so, what's the catalyst to get it there?
What fundamentals are you looking at?
What's the valuation?
What are you most interested in?
JOHN JANNARONE: Well, these guys are
growing EBITDA about 20%, which is way faster than most
of their peers.
I mean, Square is growing faster,
but Square trades at 50 times earnings or something.
So you can get this for about 12 times 2020 EBITDA.
And I think that if these guys just
post a few good quarters in a row,
the stock's going to grind up.
It's not like something revolutionary has to happen.
I mean, it's not that complicated of a business,
but it's strong.
And I don't think it's that sensitive to
the economic downturn either.
JAKE MERL: And over what time horizon do you expect this
to play out, you know the $0.80 target?
JOHN JANNARONE: I'd say--
let's say two years.
I mean, I've had things happen quicker
than I expected recently here, so give me a little time.
JAKE MERL: And what would you say
is the biggest risk to this trade?
JOHN JANNARONE: I mean, the biggest risk, and as I said,
I think there's a very, very slim chance of this happening,
is the deal does not close.
Remember, that has to happen for this
to turn into actual shares of Repay and Repay warrants.
You know, in the meantime, I think it's competition.
But I think as we discussed in the last interview, I believe--
I got into the fact that there are big, big players
out there in this space.
And if one of them made a really, really big push
into this same area, they could take business away from them.
But I think that it's a strong enough brand, and they've got--
I think the customer relations are so sticky, that I
don't see that as a huge risk.
But that's probably number one in my mind.
JAKE MERL: Well, John, that was great.
Thanks so much for joining us.
JOHN JANNARONE: Thanks, Jake.
JAKE MERL: So John likes taking profits on a short Lyft trade.
He also recommends holding on to or buying the warrants
for Thunder Bridge Acquisition at current levels.
He sees $0.80 of upside over the next two years.
That was John Jannarone, Editor in Chief of IPO Edge.
And for Real Vision, I'm Jake Merl.