Athenahealth Stock Has 80% Downside, Says Einhorn

athenahealth-stockBillionaire David Einhorn’s recent letter to shareholders sent shockwaves through the market. He claimed that we are witnessing “our second tech bubble in 15 years.”

But Einhorn came out earlier this week, clarifying that he and Greenlight are bullish on the tech sector. We profiled one of his top stock picks last week, Micron Technology. Einhorn’s fund also owns Apple and Marvell Technology.

However, he is still targeting “cool kid” stocks that trade at exorbitant valuations. There’s one top tech bubble stock that has 80% downside. And he’s actually short a basket of other stocks. Einhorn notes:

We believe that they are in a bubble, and we have shorted a good number of them in what we call the ‘bubble basket.’

There appears to be a number of momentum tech stocks that trade at obscene valuations. Which ones are Einhorn shorting?

David Einhorn is short athenahealth (NASDAQ:ATHN)

Einhorn finally gave investors some insight into the basket of stocks his hedge fund is short. He laid out his case for being short athenahealth at the Sohn Investment Conference earlier this week.

In Greenlight’s first quarter letter, Einhorn made the case that the market should be valuing tech companies on their earnings, and not sales or addressable market. athenahealth has no earnings and trades at a P/S ratio of over 6.2.

The core of Einhorn’s short thesis is that the market fundamentally misunderstands athenahealth’s business model. athenahealth is a provider of Internet based business services for physician practices. And it actually touts itself as a software company.

athenahealth’s CEO, Jonathan Bush, is a marketing master.

Bush is very good at using buzz words that captivate investors, such as “SaaS” and “cloud.” The company claims to be “a cloud software play.” Bush has even compared athenahealth to Amazon.

But the key is that athenahealth isn’t a true software company. It is more of an outsourcing company. It does the repetitive and “mundane” tasks that its clients don’t want to do, such as scanning documents and sending faxes.

Morgan Stanley believes athenahealth can get to 30% margins. Einhorn believes that isn’t possible. He points out that athenahealth is a service business and not a software one. Meaning the company’s margins have a ceiling. Einhorn believes that the ceiling is around 15%. All the major outsourcing companies have operating margins below 15%.

Einhorn thinks that athenahealth could fall 80% from its peak.

athenahealth traded at over $200 a share back in March. And before Einhorn’s presentation, shares were up nearly 50% over the trailing twelve months. According to Einhorn, revenues would have to grow at an annualized 18% for the next 15 years to support the current valuation.

His bull case is that the stock is worth $50. But his bear case is that the stock hits $14 a share.

athenahealth has already missed its organic growth target for 2013, and Wall Street has been cutting estimates for 2014 and 2015. The company missed earnings estimates by 50% for the March-ended quarter.

Being more of an outsourcing company, athenahealth just doesn’t deserve to trade with the same valuation as some of the other major cloud computing companies. Einhorn showed a slide that included various cloud companies, including salesforce.com (NASDAQ:CRM), NetSuite (NYSE: N), ServiceNow (NYSE: NOW), and Workday (NYSE: WDAY). But all of those companies trade at P/S ratios of above 6. Is he short these names too?

And if we take a broader look at the momentum stocks, there are a number of high-profile stocks that trade with P/S ratios that are above 10. These include Facebook (NYSE: FB), Tesla (NASDAQ: TSLA), Twitter (NASDAQ:TWTR), LinkedIn (NASDAQ:LNKD), and Yelp (NASDAQ: YELP).

While Einhorn has only outlined one of his top tech bubble stocks with 80% downside, he could be short any number of the stocks above.

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Einhorn is a smart guy. He’s made a number of bold, yet correct, calls in the past. Whether he’s right on the tech bubble remains to be seen, but he certainly makes valid points about the exorbitant valuations. And if the market does pull back, the stocks with sky high valuations will certainly see the largest selloffs.

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