This is the question that keeps us up at night, hurts our short positions, and makes us wonder if this is the final hour of the Titanic, or a case of entrepreneurs buying the dip?
The first company we see is Applovin Corp, which has spent over a billion dollars in the past 3 months buying back stock. Our reading of their financial statements and SEC filings suggests that they have spent down their entire cash holding, except for around $75M, plus any cash generated in the past two months. They did also push out maturities to 2030 at a cost of ~$250M as they paid down outstanding debt. This was also done in the current quarter.
The second we see is Pinterest, which is surprisingly similar in size and market, and they spent $500M in Q2 2023 buying back stock. We discovered Pinterest as Todd Morganfeld, the latest board member of Applovin, was the CFO of Pinterest when they initiated their stock buybacks despite weak operating results. After a quick look around, we wonder if this is a way to force a strategic buyer (e.g., Meta) to pay more for the company.
There are likely many others.
So, the question is why?
Obvious answer: To make their stock price go up.
Less obvious answer: Acquisitions and internal investments in growth have negative 'real' returns.
Even less obvious: They don't buy the story of recession and rising interest rates and believe the consumer will keep spending, advertisers will keep spending, and the good times will last forever.
Subtle answer: Both companies lose money, but less (losses are declining). So, they don't need to hold as much cash on hand to survive. They can operate more lean, assuming they continue to improve.
What do we do as potential investors?
Post your thoughts below...thank you for reading.
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