Jive Software (JIVE) may look incredibly hip right now, as a standout performer in the popular social media space, but the company largely owes a short-term "sympathy rally" - trumpeted by a suspicious firm that placed a bet on its stock - for its superstar status.
After debuting as a hot new Internet play last December, when it jumped 25% at the opening bell, Jive soon lost its early sizzle and spent more than a month simply trying to hold onto its original gains. That pattern continued until early February, when Facebook registered for its initial public offering and set off an explosion that ignited even long-shot players in the field. Jive itself finally caught on fire at that point, a notorious stock promoter loudly broadcasting its outsized gains, and spent two full months on a flight due north that took its stock all the way from $15 to $28 a share.
Jive executives now look incredibly rich as a result. They control almost a third of those high flying shares, records indicate, with the two young cofounders - who established Jive while in their early 20s (before Facebook revolutionized the entire industry) - boasting a combined net worth of more than $300 million all by themselves.
"Apparently, there is inherent value in any software company that has the word 'social' included in their business summary," a Motley Fool contributor marveled back when Jive first escaped from the powerful forces of gravity. "But what has changed? (AND) what will happen once the FB hysteria settles down?"
If recent history serves as any guide, the answer could prove quite scary. The most notorious high flier in that breathless rally, heavily promoted BroadVision (BVSN) has already catered multiple times since it peaked above $55 in early March and now trades at barely half the price that it commanded two months ago. Groupon (GRPN) sparked a similar chain of events before it went public, too, launching overheated "sympathy plays" that soon fizzled out and have since landed near the bottom of their all-time trading range. Even Groupon itself, the star attraction of that big production, soon lost its early shine and followed up with such a dismal performance that the early $30 high flier now fetches barely one-third of its peak price and hovers less than $1 above single-digit territory.
Based on its hefty $1.48 billion market value, Jive may look like an accomplished powerhouse with enough strength to weather a potential storm. In reality, however, Jive remains the same vulnerable company that languished around $14 a share - barely half its recent high - just three short months ago: a bleeding Internet player with expanding revenues but no earnings anywhere in sight.
At this point, in fact, Jive has still yet to achieve the key milestones credited to the company before it even went public last year. When Forbes introduced Jive as a sexy IPO candidate last summer, following discussions with its senior management team, the magazine indicated that the company enjoyed a measure of financial strength that remains lacking to this very day.
"Jive has passed a $100 million revenue run rate, according to people familiar with the company," Forbes stated at the time. And "the company says it has been profitable since day one."
That glowing review soon looked like outright fantasy, however, actually rivaling the exaggerated hype that has followed since that time. When Jive filed for its IPO a few weeks later, it supplied official financial statements that exposed the true condition of the company.
Jive did not respond to questions for this story.
For starters, as The Wall Street Journal quickly emphasized, Jive generated sales that were "significantly less than the roughly $100 million often seen these days as a benchmark for technology companies ready to go public." Jive had instead mustered revenue of just $34 million during the first half of 2011, corporate filings show, and would go on to report total sales of $77 million - about 25% shy of the levels suggested earlier - for the entire year.
Far worse, of course, Jive had yet to show a profit on its books at all. The company had instead spent five straight years losing money, its corporate filings now reveal, with its total deficit set to balloon past $100 million (following a $50 million loss in 2011) by the time the current year came to an end.
Warning that this trend would likely continue for the "foreseeable future," Jive originally pegged its own value at just $8 to $10 a share. Although Jive hit the market as a $15 high flier, the stock soon found an early ceiling at $17 a share -- $11 below its recent high - and then stalled out in the mid-teens after that time.
Even after a month-long slide that has dragged the stock below $24 a share, Jive still looks wildly overvalued when compared to the rest of its peer group. Jive currently trades at almost 19 times its prior-year sales, records show, in a booming software technology sector that trades at barely three times its recent sales instead.
In other words, that multiple reveals, investors are paying the equivalent of $19 for every $1 in sales reported by the company last year. They're paying a high price for future sales as well, records indicate, by effectively spending $13 for every $1 in revenue anticipated from Jive this year and almost $10 for each $1 in revenue expected from the company the year after that.
Market bears have placed sizable bets against Jive in the meantime. Early this year, when the lockup period still remained a distant threat, short sellers limited their trading in the stock. Over the course of the past two months, however, they have rushed to borrow and sell a huge number of Jive shares that they expect to repurchase at much lower prices and then bank the difference as a tidy profit.
By mid-April, records show, they had sold a whopping 2.5 million shares of the stock short -- more than double the number they had sold just six weeks earlier -- in a bold display of their growing confidence. With a full 10% of its available stock shorted at that point, Jive featured a far higher short interest than two better-known bear targets in the social media sector - fellow newcomers Groupon and Zynga (ZNGA) - that have since tanked and now trade around their all-time lows.
Wall Street research houses actually viewed Jive as richly valued before it shot toward the moon, records indicate, with several of them launching coverage of the stock with cautious neutral ratings as a result. At first, they set target prices well below recent levels and - clearly blindsided by the powerful advances that would follow - only later raised their targets in order to reflect those enormous gains.
Take UBS, for example, one of the underwriters that brought Jive to the market in the first place. In late January, about two weeks before Jive even launched its breathtaking rally, UBS analyst Brent Thill initiated coverage of the stock with a lukewarm neutral rating due entirely to the high price of its shares.
Although he acknowledged several other risks, clearly legitimate in their own right, Thill seemed willing to overlook those at the time. For starters, he noted that Jive competes against a group of larger rivals - ranging from heavyweights Microsoft (MSFT) and IBM (IBM) to "high-profile Salesforce.com" (CRM) and "freemium-based Yammer" (which charges nothing for its service) - but felt comforted by the fact that the company kept expanding its market share, anyway. (Notably, records show, Salesforce.com now boasts a major contract with a giant technology company that ranks as a treasured client of Jive itself.) Thill also recognized that Jive would likely remain unprofitable for years, a trend that he accepted as a tradeoff for rapid revenue growth, and briefly mentioned another threat -- which could soon hammer the young stock - as well.
Like several other newcomers to the sector, such as LinkedIn (LNKD) and Groupon, Jive withheld the majority of its stock from the public market when it debuted on the Nasdaq exchange. Come June, however, Jive must lift the restrictions on that stock - most of it originally issued for around $5 a share or less - and could see its freely trading "float" expand to roughly three times its current size as a result.
Even LinkedIn, a standout performer among the new social media stocks, took a massive hit back when its "lockup" period came to an end. LinkedIn actually dragged Groupon down along with it (as covered in more detail in the related story seen below), while Zynga - which debuted just three days after Jive itself went public - recently suffered through a similar meltdown of its own.
While Jive itself could soon face similar exposure, Thill devoted most of his attention to more upbeat topics when reviewing the company instead. He focused primarily on revenue growth, predicting that Jive would continue to outpace the competition in this particular category, and assigned a hefty 40% premium to its stock as a reward. At that point, however, Jive already traded within $1 of the 12-month target price that resulted from his careful exercise.
Back then -- with the stock boasting the highest multiple in its entire peer group - Jive still hovered around $15 a share.
Lebed now promotes risky stocks on behalf of the so-called "National Inflation Association" (NIA), its own co-founder has acknowledged, which began touting BroadVision - a hopeless loser in recent years - the day before Jive went public and brought some fresh attention to the group. The NIA owned 158,000 shares of BroadVision going into that publicity campaign, a stake that would rapidly skyrocket in value from $1.31 million to $8.92 million on constant hype,with the firm urging investors to buy the stock even as it regularly dumped those same high flying shares.
For Lebed, the reported mouthpiece of that organization, stock promotion has delivered riches well beyond those achieved by traditional means. He actually perfected the art as a teenager, records indicate, and wound up downright famous - or at least infamous - as a result.
"If you go to Wikipedia and look up 'pump and dump,' the first (example) they show is Jonathan Lebed," celebrity investment broker Peter Schiff noted last year on his popular radio program. "It's almost as if he invented it!"
Just like the doomed microcap names that Lebed has favored in the past, records indicate, BroadVision responded in dramatic fashion. A listless single-digit stock before the NIA endorsed it, BroadVision suddenly exploded on a massive surge in volume and practically quadrupled - soaring from roughly $8 to $32 a share - by the time that Facebook sparked the sudden craze for Jive itself.
Once that happened, signaling that the fever could prove contagious, Lebed began trumpeting Jive as an impressive high flier as well. The NIA wound up with a multimillion-dollar position in Jive itself the very next month, with the firm soon cutting that $2.5 million stake by almost half - as the stock hurled toward its peak - and ultimately dumping it altogether.
"Jive is also looking very strong in recent days," the NIA emphasized in the meantime. "If the whole enterprise social space starts taking off together next week, they could become the second-biggest story on Wall Street today, right after the #1 story - the Facebook IPO!"
The last major sympathy rally to ignite the technology space ended very badly for some investors, however. With excitement building ahead of the Groupon offering last year, records show, antsy investors began snatching up shares of companies with a presence in the same space. That hype resurrected an outfit known as Local.com (LOCM) -severely wounded after TheStreetSweeper had exposed its flaws - by sparking a sudden burst of interest in its shares.
While Local.com had languished below $4 a share before that time, the stock rocketed toward $7 on the initial buzz and -- with the help of additional chatter -- still hovered around the $5 mark one short year ago. But the stock tanked by the time that Groupon finally went public, sinking another 18% to $2.64 on the day of the actual IPO, and has spiraled even lower since that time.
As noted above, Groupon itself soon cratered as well. Groupon arrived on the market just as LinkedIn saw its lockup period come to an end and ruined the honeymoon that young stocks frequently enjoy. Both stocks fell in unison on the downpour of LinkedIn shares, The New York Times observed as they plunged, with Groupon taking such a painful hit that it wound up within a nickel of its original offering price.
"The expiration of LinkedIn's lock-up period is likely weighing on the minds of some investors," the newspaper decided, "who are worried that Groupon's stock will take a beating once employees are allowed to sell their shares."
While Groupon has yet to face that particular test, which looms ahead next month, the company has messed up so many times by now that its stock chart already looks like a disaster. Despite its brief time on the market, Groupon has already managed to: miss Wall Street profit estimates by posting an outright loss the first time it released financial results; restate its numbers utilizing proper accounting techniques that made its results look even worse than they already were; prompt a reported investigation by the U.S. Securities and Exchange Commission because of that same financial restatement; ruin the credibility of its boardroom audit committee to such an extent that it replaced most of its members in a desperate effort to regain investor trust; and destroy all of its IPO gains, with its shares falling to barely half of their offering price, before its lockup period has even comes to an end.
So far, Jive itself has provided only one quarterly update to Wall Street since going public late last year. (The company will follow up with a new set up of numbers next week.) Although Jive beat Wall Street expectations with those year-end results, records indicate, the company still lost plenty of money - and fell short of its own financial targets - in the process. As it turns out, corporate filings show, Jive hoped to book more business and burn less cash than it did in the second half of the year.
Nevertheless, when Jive released those numbers to the public, CEO Anthony Zingale seemed totally delighted with the recent performance of the company. Indeed, Zingale specifically stated that Jive felt "thrilled to announce record financial results" that clearly represented "a strong finish to a remarkable year" for a company "well-positioned to execute on (its) growth strategy."
Despite that upbeat tone, however, the news looked rather bleak. While revenue soared by an impressive 53% in the fourth quarter, records show, expenses literally exploded (with overhead costs more than doubling) over the course of that same period. As a result, operating losses skyrocketed by a whopping 85% -- easily outpacing the growth in revenue - during the final quarter of that celebrated year.
A scrappy underdog that has somehow overcome long odds from the start, Jive selected a CEO who fits that same kind of image. His story, as reported by Forbes (back when Jive was "profitable") last summer, goes something like this:
A bartender's son who grew up in Cleveland, Zingale bootstrapped his way through college at the University of Cincinnati by working as a summer trash collector. Armed with a dual degree in business and engineering, he then headed out to Silicon Valley and soon made a new for himself as a rising star in the field. He paid his dues at a string of technology companies, starting with giant Intel (INTC), and then went on to serve as the turnaround CEO of scandal-tainted Mercury Interactive before ultimately landing at Jive itself.
Back then, records show, Jive looked downright incapable of spawning paper millionaires. The company generated a meager $17 million in revenue during 2007, when Zingale originally joined the board, and wound up with less than $10 million in the bank by the end of the following year. By the time that Jive appointed Zingale to serve as its CEO in the first half of 2010, however, the company had already confirmed plans for a public offering.
"About two-thirds of the perspective in the Valley, I'm not a fan of," he told Forbes right after Jive stormed onto the Nasdaq exchange. "I'm not a fan of 'It's all about me.' I'm not a fan of 'I've got to be on the cover of your magazine.' I'm not a fan of 'I make all the decisions, and all the success is because of me.'"
Today, Jive itself could arguably confess the same kind of thing. It could deliver a message - validated by the evidence presented above - that goes something like this: It's not about Jive, or the decisions that it has made, or the success that it hopes to one day achieve. It's about Facebook, and its decision to go public, and the success that it brought to other names in the group.
With Lebed serving as its reported mouthpiece, the NIA relentlessly touted BroadVision and routinely spotlighted the impressive gains recorded by Jive itself as well. At the same time, records show, the firm also began to quietly dump its BroadVision stock - striking it rich on the very hype that it helped create - along the way. The NIA then emerged with a multimillion-dollar position in Jive itself, its disclaimers now reveal, and promptly started cashing in its profits on that highflier, too.
Notably, his fellow NIA co-founder has revealed, Lebed himself once offered this advice: "Don't invest in the promoted stocks." His record only underlines that message. If Jive follows the same familiar pattern established by other Lebed picks over the years, history indicates, the stock has likely peaked - at an artificially high price - on a powerful mix of hope and hype alone.
"Nobody makes investment decisions based on reading financial filings," Lebed declared in a big article published byThe New York Times years ago. "Whether a company is making millions or losing millions, it has no impact on the price of the stock. Whether it is analysts, brokers, advisors, Internet traders, or the companies, everybody is manipulating the market.
"If it wasn't for everybody manipulating the market," he concluded, "there wouldn't be a stock market at all."
I am short JIVE. Prior to the publication of this investigative report, TheStreetSweeper (through its members) established a short position in JIVE with the intention of profiting on any future declines in the stock price. Currently, TheStreetSweeper has sold a total of 93,529 shares of JIVE short at an average price of $23.91 a share. Going forward, TheStreetSweeper may choose to adjust the size of this investment - by increasing, decreasing or covering its short position in the stock - and will fully disclose the details of any future transactions as those trades occur.
Disclaimer: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies they cover. To contact Melissa Davis, the primary author of this report, please send an email to firstname.lastname@example.org.