Shares in job search platform SEEK Limited (ASX: SEK) have made a strong recovery from the start of the month, following tension between US activist short-seller Blue Orca and SEEK’s business in China, Zhaopin.
The SEEK share price has been a great success story over the years, but I’m sure many investors have been left wondering if the current share price is justified given the associated risks and the exposure to economic cycles.
SEEK share price chart
What does SEEK do?
SEEK is a global leader in employment and education-related services, with operations in over 18 countries. Its business is broadly split between providing a platform for employment advertisements, and a learning platform for vocational and educational courses.
SEEK generates revenue through multiple streams, however, much of it is through ad revenue. As such, SEEK is very much leveraged to the overall economic cycle, which will influence the number of jobs that are listed on the website.
What’s happened recently?
US activist short-seller Blue Orca has been trying to draw public attention to SEEK’s Chinese business Zhaopin. The accusation from Blue Orca is that Zhaopin has listed fake job listings and has also been provided “zombie resumes” from users.
Blue Orca CEO Soren Aandahl claims that SEEK carries the valuation of a growth stock, without the underlying growth to justify it. Blue Orca estimates a much lower valuation for the company, which is the result of Zhaopin capitalising research and development costs over time, rather than expensing these costs as they’re incurred on the income statement.
Instead of recognising costs upfront, R&D costs can be amortised over 3-5 years, resulting in a much higher EBITDA and net income figure in the earlier years.
The growth of the global SEEK business has mainly been driven by Zhaopin, so any disruption in this segment will have large underlying effects on the valuation of the shares on the ASX.
When Soren Aandahl previously worked at Glaucus, successful activist shorts were executed on sandalwood grower Quintis as well as Blue Sky Alternative Investments.
Are SEEK shares a buy?
In SEEK’s announcement at the beginning of the month, it claimed that many of Blue Orca’s claims were inaccurate and substantiated.
SEEK’s management has indicated its accounting practices have also been consistent and compliant with International Financial Reporting Standards (IFRS).
I would be willing to back SEEK’s management here, although I still think I’d rather sit out on this one for the moment given the uncertainty. I’d rather invest in these 3 ASX growth shares today.
