Analyzing the #Dayforce Short Attack #investorrelations #capitalmarkets #shortattack
Published 2024-04-08
Capital Markets / Investor Relations in Two Minutes or Less
What the $DAY short attack teaches public company executives
The best short attacks are elegantly simple.
Blue Orca’s short attack of Dayforce is complex with a lot of moving parts contained in the 30-page report.
Several accounting and corporate governance issues are identified and seem valid.
However, the report falls apart around a discussion of valuation.
Looking at the Sell-Side, 18 analysts cover $DAY, with 10 Buys and 8 Holds.
The Street does not seem overly bullish on Dayforce.
The 5 Components of the $DAY Short Attack
Blue Orca Capital identified five areas that support its short thesis.
1. Revenue Pull Forward Inflates Top Line and Profits
2. Misleading Profit Metrics
3. Aggressive Accounting
4. Accounting Issues + Corporate Governance Issues
5. Valuation
The Blue Orca short thesis would have been solid were it based solely on items 1, 3, and 4.
The short seller spends too much time arguing about stock valuation throughout the report and convolutes many of the accounting and corporate governance issues the report identifies.
Why the Valuation Discussion Fails
Blue Orca seems focused on the wrong valuation metrics and wrong time frame, which seriously weakens their valuation argument.
Three Focal Areas for Valuation
1. What Is the Right Metric? EV / S or EV / EBITDA?
2. Current Multiples of Forward Multiples?
3. Where is the Rule of 40 / 50?
SaaS investor typically focus on EV / S and should be focused on Fiscal Year + 1 (FY+1) or Fiscal Year + 2 (FY+2) to calculate valuation.
Blue Orca is focused on latest twelve-month and nearest twelve-month valuation metrics and EV / EBITDA.
Lastly, Blue Orca omits any discussion of the SaaS Rule of 40 or SaaS Rule of 50 performance for $DAY.
What Do the Forward Multiples Tell Us?
Dayforce actually seems undervalued on forward multiples.
Based on S&P Capital IQ data, $DAY trades at roughly 5x / 4x for EV / S for FY25 / FY26, which seems undervalued as 6x serves as a baseline in SaaS, and trades roughly 17x / 14x for EV / EBITDA for FY25 / FY26.
On a Rule of 50 basis expectations call for 55% in FY26!
$DAY at 4.4x EV/S and 55% on Rule of 50 in FY26 = Undervalued! It should be north of 6x EV / S
Key Learnings
1. $DAY Forward Multiples reflect / discount Blue Orca’s concerns
2. Focus on Forward Multiples not Current Multiples as a Public Company
3. Accounting + Corp. Gov. Issues = Short Target