Short Idea for L/S Interview
I've developed a short thesis and the thesis basically hinges on dramatic deceleration of growth in the next FY and FY+2 to ~8-10%. It's EBITDA margins are ~55% and it trades at a 33x NTM EBITDA.
Without getting into too much detail, growth deceleration due to: a) overhang of pharma spend in FY26-27 with Pharma SG&A decelerating vs. previous years / slowing pipeline of drug approvals b) deteriorating performance amongst long tail of customers c) worsening NWC trends in Deferred revenue
Why growth will suffer longer term: a) platform usage / engagement is ambiguous at best and misleading at worst - lower usage = lower ad revenue b) ROI figures touted to advertisers may be inflated c) competition is heating up
I think consensus pretty much has also growing at ~10% but my thesis hinges on multiple re-rating, which I believe at it's current growth trajectory, is overvalued. Similar comps are trading at 24-25x, which I believe should be the appropriate multiple.
I know the theses is usually based on variant view from consensus - in this case, I can justify 10% growth but not sure how compelling that would be. It really is dependent on valuation.
Is that a compelling thesis for an interview if they ask for a short?
Your short thesis has potential, but it could benefit from a sharper focus on the variant view and a more compelling narrative. Here's how you can refine it for an interview:
Variant View: While you acknowledge that consensus expects ~10% growth, your thesis should emphasize why your view is different and more accurate. For example:
Valuation Argument: Your valuation argument is solid, but you need to tie it more directly to the growth deceleration. Explain why the current 33x NTM EBITDA multiple is unsustainable given the expected growth slowdown and why a re-rating to 24-25x is justified. Use comps to strengthen this argument, but also address why the market hasn't already priced in this risk.
Catalysts: A strong short thesis needs clear catalysts. What specific events or developments will bring the growth deceleration and multiple re-rating to light? For example:
Risk Management: Acknowledge the risks to your thesis and how you would mitigate them. For instance, if growth deceleration takes longer to materialize or if the company manages to sustain its margins despite slowing growth, how would you adjust your position?
Compelling Narrative: Frame your thesis as a story. For example:
By addressing these points, your thesis will come across as more compelling and well-rounded in an interview setting.
Sources: Q&A: Former Long/Short Research Analyst at Top HF -> VP of Growth Equities at BB, My Private Equity Recruiting Process, Q&A: HF Analyst, PE interview question - If you can only know 3 things for an investment analysis?, Q&A: Former Long/Short Research Analyst at Top HF -> VP of Growth Equities at BB
Generally difficult to pitch (particularly a short) without a specific catalyst. Usually you can hope an earnings downgrade cycle would result in the multiple de-rating, but if your KPIs are in line with consensus (and potentially in the price) it’s rough to take a view on the multiple alone.
You’re betting on outside perceptions changing with no difference in incremental data/narrative if your numbers are in line w cons.
My top line revenue is in line with consensus but I can also flex it down. Consensus doesn't model the KPIs to the degree in which I have as well. Do you know what's the magnitude delta vs. consensus it's considered compelling?
My thesis is also that the business will be fundamentally worse off from here given a) usage / engagement metrics are misleading b) ROI figures invite scrutiny given the high spend vs. ambiguous ROI from DOCS alone c) competition heating up especially from other ad platforms d) deteriorating performance in SMB customers
Essentially, I'm also arguing that the moat around the platform and network effect on the both sides could break down, which hopefully results in multiple re-rating.
I think how this idea pans out is a mix of both EBITDA deterioration and multiple re-rating (heavier weighting on the latter) with the catalysts I see are earnings seasons proving out these points.
Be clear about your catalyst path and variance vs the street
The below posters are conflating an idea you can trade (with the multiple derating on external perceptions - very shaky but not uncommon) with an idea you can pitch. There’s a way to pitch stocks, variance and catalysts.
Level of differentiation depends on sector and what’s driving it, if you’re 0.5% off on the quarter but 20% off FY+2 and there’s clear visibility (I.e guidance cut etc) then that’s enough.
Wdym by multiple re-rating?
Is this purely EV/EBITDA declining or changing as the market reacts?
Never short on valuation alone
First thing he said is growth decelerates.
"my thesis hinges on multiple re-rate" "it really is dependent on valuation"
It sounds like what he is saying is that consensus is already baking in his growth decel he just thinks the multiple is too high
never understood this saying. Every relative value oriented pod (so like 60% of them) are doing exactly that for 80% of their shorts. If you're an index hugging mutual fund that leans into the cheaper names in your universe and under indexes the rest, you're synthetically doing the same thing. I think a more cogent point is don't just short the more expensive names because most of the time they deserve the higher multiple that they have (just like most of the shitcos trading at 3-5x FCF likely have some terminal overhang and buying them probably isn't a good bet either).
This is clearly doximity. Streets already expecting growth to decel from high teens to 10%. What’s incremental? Are expectations not low enough? Anything that’s fundamentally broken? Macro around lower pharma spend is understood and baked in. Is there an emerging competitive threat that could break the network effect moats that they have?
lol ppl love to shit on other ppl’s pitches all the time. it happens everywhere whenever someone pitches something. pitch sounds fine to me. catalyst path would be nice for shorts. also would be good to say why u don’t think this thing gets bought / takeout risk. if its mega large cap then even more reason imo to not need catalyst path in reality. but whatever this is a pitch so gotta frame it to sound smart and stuff
Thanks lol. For a interview setting (i.e. do you have a long & short handy), do you know how in depth they go in the line of questioning? I'm assuming pretty deep if it were for a case study.
Rule of thumb is if you’re pitching something, know the pitch inside out and be ready to answer any questions. I have had interviews where it was kept high level and some where I was grilled. The latter usually set me apart from other candidates and common feedback was that not many people do deep enough work to focus on what matters and remain convicted when questioned a lot.
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