GSX Techedu Inc (GSX) Is An Obvious Bubble

Whitney Tilson’s email to investors discussing the bursting of the bankruptcy bubble; GSX Techedu Inc (NYSE:GSX) is an obvious bubble and likely near-total fraud; How Berkshire Hathaway May Have Been Snookered in Germany; The five steps to cultivating mentors and developing relationships.

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Q2 2020 hedge fund letters, conferences and more

The Bursting Of The Bankruptcy Bubble

1) In my June 9 e-mail about the bankruptcy bubble, I wrote:

RV Capital DAXRV Capital DAX

RV Capital DAXRV Capital DAXRV Capital Co-Investor Letter for the first half ended June 2020, titled, “Business Owner TGV vs. the DAX.” Dear Co-Investor, The NAV of Business Owner was €777.13 as of 30 June 2020. The NAV increased 4.5% since the start of the year and 683.2% since inception on 30 September 2008. The DAX was down 7.1% Read More

The bubble over the past week in bankrupt (or near-bankrupt) stocks may be the craziest thing I’ve seen since the Internet bubble.

Take a look at the gains in these stocks yesterday:

• Extraction Oil & Gas (XOG): 248%

• Chesapeake Energy (CHK): 182%

• Noble (NE): 161%

• Whiting Petroleum (WLL): 152%

• Valaris (VAL): 135%

• Hertz Global (HTZ): 115%

• J.C. Penney (JCPNQ): 96%

• RTW Retailwinds (RTW): 74%

Every one of these stocks isn’t just likely to decline… they’re all ZEROS!

This insanity is being driven by individual investors day trading and speculating like crazy…

It saddens me to see this because while this bubble (so far, anyway) remains microscopic in size, it’s still a few billion dollars that these investors are sure to lose – and I suspect these are losses these folks can’t afford during these tough times…

In a little more than five weeks since then, this bubble has completely burst… These stocks are down an average of 74%, as you can see in this table:

Company

June 8 Closing Price

Yesterday’s Closing Price

Percent Change

Extraction Oil & Gas (XOGAQ)

$1.48

$0.15

-90%

Chesapeake Energy (CHKAQ)

$69.92

$6.60

-91%

Noble (NE)

$0.73

$0.28

-62%

Whiting Petroleum (WLL)

$3.48

$1.08

-69%

Valaris (VAL)

$2.19

$0.63

-71%

Hertz Global (HTZ)

$5.53

$1.44

-74%

J.C. Penney (JCPNQ)

$0.63

$0.27

-57%

RTW Retailwinds (RTWIQ)

$0.41

$0.09

-78%

Don’t be tempted to bottom-fish here – as I wrote on June 9, these stocks are all ZEROS!

GSX Techedu Inc Is An Obvious Bubble And Likely Near-Total Fraud

2) I’m not usually proven so right, so quickly. In fact, I’m frequently early in my calls – as is the case in what I wrote on May 20 about Chinese online-education company GSX Techedu Inc (GSX):

My friend Carson Block of Muddy Waters Research was spot on in his warnings about Luckin Coffee, so investors would be wise to carefully consider his latest report about another Chinese company he believes is a fraud, online education provider GSX Techedu Inc (GSX). Here’s his summary:

• We are short GSX Techedu Inc because we conclude that it is a near-total fraud.

• We conclude that at least ~70% of its users are fake, and we think it’s quite likely that at least ~80% of its users are fake.

• Our conclusions are based on GSX’s own user and attendance data files (i.e., this is not from “scraping” data). We downloaded GSX’s data from more than 200 paid K-12 classes covering 54,065 unique users.

• In addition, a former GSX manager corroborated our analysis, and explained various details of GSX’s extensive bot operation.

• Based on the near total faking of users, we assume that the fraudulent portion of GSX’s revenue is at least equal to the percentage of fraudulent users, although it would not surprise us if the ASP on the real portion of GSX’s business is fraudulently inflated too.

• We conclude that GSX is a massive loss-making business. Without users, there is no revenue. We also conclude that GSX greatly understates expenses. Regardless of how one cuts it though, GSX is an almost completely empty box.

• Amazingly, Chairman Chen has found a way to make GSX shares even more dangerous for long holders – he has pledged at least $318 million of stock. Long holders of GSX face the risk that the margin lenders will be forced to aggressively sell the stock, crashing the price.

Since then, GSX Techedu Inc has risen 145% from $30.58 to $75.01 as of yesterday’s close. It now has an $18 billion market cap and trades at 40.3 times trailing revenue. The stock makes Tesla (TSLA) look like a bargain at “only” 11.3 times revenue!

I asked Carson last night for his latest thoughts, and he replied: “It’s a near-total fraud, and ramping the stock doesn’t make it any more real.”

I haven’t done the in-depth work Carson has – as I no longer run a hedge fund and therefore don’t short stocks – but I have little doubt that he’s right about the company and was just early in his call on the stock, which today is in an obvious bubble.

Mark my words: When it bursts, it’s going to look like Wirecard (WDI.DE)…

But in the meantime, it certainly underscores how tough short-selling can be!

How Berkshire Hathaway May Have Been Snookered in Germany

3) I forgot to include this New York Times article in yesterday’s e-mail about Berkshire Hathaway (BRK-B). I can’t recall a time when this has ever happened: How Berkshire Hathaway May Have Been Snookered in Germany – NYTimes.

Only a few weeks after Berkshire Hathaway bought what looked like an upstanding example of German engineering prowess, a manager in Warren Buffett’s widely admired corporate empire received an unsettling email.

While embarrassing, it’s a rounding error for Berkshire and certainly doesn’t change my view about the attractiveness of its stock.

Best regards,

Whitney

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