Friday, November 07, 2014

Is Einhorn Trying to Pop the Bubble?

Is David Einhorn's plan to force the breakup of EMC?

Greenlight Capital, the $10 billion hedge fund run by David Einhorn, released its quarterly letter to investors on Wednesday, in which it announced, among other material changes, additional long-term positions in EMC (EMC). Known for betting on both rising and falling stock prices, Einhorn’s new “medium-sized” investment in EMC has raised eyebrows about his true intentions and expectations for the stock.

The letter explained Einhorn’s belief that EMC is undervalued and trades at a sizable discount compared to competing data storage and enterprise hardware companies.

This discount is the result of EMC’s corporate structure, which allows the company’s businesses to operate independently, while still trading “in an unusual way that obscures shareholder value,” according to a letter from Elliott Management Corporation last month.

VMware (VMW), a world leader in virtual infrastructure software, was acquired by EMC for $600 million in 2004 as a privately-held company, but began trading publicly in August 2007. Since then, shares have increased almost 50%, and VMware’s market cap has risen to nearly $36 billion. Elliott has been pressuring EMC to spin off the software company, but EMC has repeatedly stated that the subsidiary is not for sale.

Is it possible that Einhorn’s additional stake in EMC is a precursor to his own pressures to break up the software conglomerate? Selling VMware would net EMC a significant profit, and could cause massive disruptions in the technology space if a bidding war ensued. Other tech Goliaths like Hewlett-Packard (HPQ), Cisco (CSCO), Oracle (ORCL), and IBM (IBM) would all benefit from acquiring VMware and adding the company’s products and expertise to their own existing offerings. The fallout from both the bidding war and subsequent cash influx for EMC would significantly increase Einhorn’s winnings.

Sticking Amazon in the Bubble Basket

Earlier this year, Einhorn described his “bubble basket” of tech shorts, explaining that we are currently witnessing another tech bubble that is sure to pop in the near future. Could his hedge fund’s additional purchase of EMC stock be in preparation for the aftermath of the bubble bursting, or is Einhorn himself looking to be the one holding the proverbial pin?

In his letter to Greenlight investors, Einhorn mentioned an increased in his fund’s exposure to Amazon (AMZN), another bubble basket short. Citing a lack of profitability amid slowing growth, Einhorn expressed his belief that “principal bullish assumptions” about the world’s largest retailer “will ultimately prove false.”

While it’s true that Amazon hasn’t been pulling in higher profits despite its massive growth, the company has been taking steps to expand its reach and further strengthen its already-suffocating stranglehold on the retail industry. Jeff Bezos, Amazon CEO, spent more than a week in India last month to hype his company’s entry into the country and publicly present a $2 billion check to the manager of Amazon India.

Additionally, Amazon has been spending billions of dollars on expanding fulfillment centers across the U.S. to increase the number of cities eligible for same-day delivery of online orders. Currently, more than 30% of the country falls within Amazon’s same-day fulfillment boundaries. As completion of the additional warehouses advances, Amazon also plans to expand its involvement and influence in the grocery delivery arena, a $600 billion market.

So, while Amazon’s current endeavors haven’t yielded the significant profits that Einhorn would like to see, the company is clearly laying the groundwork for its long-term future success in multiple markets. Even if Einhorn’s plan is to burst today’s tech bubble in hopes of cashing in with a slew of shorts, Amazon will remain strong.

Bottom Line

David Einhorn’s interest in EMC seems to go hand-in-hand with those of activist investors like Elliott Management Corporation. While Einhorn never openly admitted plans to push for the company’s breakup, it’s clear that such an instance would be in his favor.

As for his criticism of Amazon’s lack of profitability, the retail giant still a solid long-term bet that will turn those profits once the groundwork and infrastructure is finally laid for its massive expansion plans.

Article originally appeared on (11/07/2014)

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