Why We’re Selling Berkeley Lights Stock

If you decide to bare your investing decisions for the world to see, you better do so with conviction. Unless your thesis changes, you should never sell a stock. When additional information becomes available that threatens your thesis, you ought to examine it objectively and act accordingly. That’s why when activist short-seller Scorpion Capital released a 158-page scathing report today on Berkeley Lights (BLI), we needed to reexamine our thesis.

Excerpt of Scorpion Capital's scathing report on Berkeley Lights. Credit: Scorpion Light
Credit: Scorpion Capital

For those of you that don’t know about activist short selling, here’s a primer.

About Activist Short Selling

Shorting a stock means you’re betting it will fall. If you short a stock, then publish a report telling the world it’s shite, that’s an apparent conflict of interest. Consequently, you’d better be damn sure what you’re saying is truthful and have the legal resources to defend yourself regardless. A successful and legitimate short activist will often go to great lengths to prove a thesis because their reputation and money is on the line.

The firm that released the report on Berkeley Lights today is called Scorpion Capital.

Short blurb about Scorpion Capital. Credit: Scorpion Capital
Credit: Scorpion Capital

They list one individual on their “About Us” page – Kir Kahlon – a man whose specialty is shorting life sciences companies. That’s how he’s made a living over the years, working for various hedge funds including a stint with the famous activist investor Carl Icahn. Consequently, you can expect his firm’s report to paint the worst possible picture of Berkeley Lights. Unsurprisingly, some of the verbiage is quite dramatic.

In our experience, synthetic biology is another meaningless term and may as well be a synonym for publicly-traded scam.

Credit: Scorpion Capital

Bearing in mind that the author of the report is short the stock, let’s try and look for objective insights that help inform any decision we might make as a result.

The Scorpion Capital Report on Berkeley Lights

The report is an absolute beast, so let’s try and separate it into parts.

Customer and BLI Ex-Employee Interviews

The final 128 pages of the report are the interviews that Scorpion Capital conducted with customers (17 scientists and users across 14 of BLI’s largest customers.) and ex-employees of Berkeley Lights. Let’s assume the latter are all disgruntled employees with an axe to grind. As for the customer interviews, they talk about an overpriced machine with error rates around 50% that’s difficult to use. Pages 30-40 summarize the findings while the remainder of the report provides the detail surrounding each of the customer interviews. Let’s assume that Scorpion cherry-picked all the scathing interviews and omitted ones that spoke highly of Berkeley Lights. Still, the companies they’re speaking with are notable.

Excerpt of Scorpion Capital's report: Detailed findings from customer interviews. Credit: Scorpion Capital
Credit: Scorpion Capital

If we assume that at least several of the interviewees are speaking the truth about Berkeley Lights’ shortcomings, then that’s a concern.

A Long List of Red Flags

The reason Scorpion began looking at Berkeley Lights in the first place is because of lackluster growth. Since BLI released their one and only product back in 2016, they’ve placed a total of 92 machines. In short, the concern is that BLI isn’t managing the sort of revenue growth you’d expect to see from a company with a total addressable market of $23 billion. A dearth of academic papers citing BLI’s platform is raised as a concern, along with questions about the caliber of customer testimonials that seem to be missing any of the big names BLI is said to be working with or has worked with. (At the time of their IPO, BLI’s customer list included eight of the ten largest biopharmaceutical companies in the world.) That’s just the tip of the iceberg as the report goes on to cite numerous red flags uncovered through what appears to be an extensive research effort.

We need to make a decision based on the additional information made available today. There are three possibilities:

  • Buy more shares
  • Sell our position
  • Do nothing

In light of this scathing report, and the uncertainties surrounding the AbCellera lawsuit we highlighted before, option one is off the table. That leaves us with one decision. Do we sell our position in Berkeley Lights?

Should We Sell Berkeley Lights?

Most readers probably don’t realize just how risk averse we actually are. Across the total sum of assets we’re managing right now, 21% is allocated to our tech portfolio. Of that, around 24% is in cash. That means our total exposure to tech stocks right now sits at 17.5% of total assets.

Let’s look at our Berkeley Lights investment which is one of several nanotechnology stocks we’re holding. We invested about 2/3 a position size worth of cash (2%). That’s since fell -50%, so our current position size is 1% of our tech portfolio. If the stock goes to zero, that’s what we stand to lose – about 1% of our tech portfolio value or about 0.23% of our total assets. There’s a temptation here to just “see what happens,” but that’s a lazy response. The correct thing to do is revisit our thesis – the reasons why we invested in BLI to begin with – which are clearly stated in our last piece on BLI titled Why is Berkeley Lights Stock Falling?

  • They have loads of reference clients and they’ve demonstrated traction with growing revenues
  • They’ve built a consumables-heavy platform that can be used to sort cells.
  • They can cut the time it takes to do something important from weeks to days

Regarding the first bullet point, Scorpion just presented us with 128 pages of evidence that says reference clients aren’t saying nice things about BLI. What’s going to happen when BLI salespeople encounter objections that point to this report as a reason for not wanting to purchase their platform? True or not, some serious damage has been done.

As for revenue growth, it’s no doubt been flat for BLI, but we’ve been hanging our hat on this statement from the company:

Berkeley Lights continues to expect full year 2021 revenue to be in the range of $90 million to $100 million, representing 40% to 56% growth over the full year of 2020.

Scorpion Capital believes – with good reason – that it seems unlikely BLI will pull out two record quarters in a row to hit the lower range of their guidance.

BLI 2021 guidance.  Credit: Scorpion Capital
Credit: Scorpion Capital

As for our assumption that BLI is a “consumables-heavy platform,” that’s called into question by Scorpion’s report (page 21) which questions why consumables are not growing alongside the number of installations. This implies that customers aren’t using the BLI platform once they purchase it (something that’s backed up by their customer interviews).

Image showing consumables usage is not keeping pace with machine installs - Credit: Scorpion Capital
Consumables usage is not keeping pace with machine installs – Credit: Scorpion Capital

The above might be dismissed as new customers still kicking the tires, but it doesn’t explain why consumables usage appears to have stalled over the past 12 months.

Several other concerns the report raised mimic red flags we’re always on the lookout for – customer concentration risk, and revenues from services/projects.

Three customers accounted for more than half of BLI’s revenues last quarter. Scorpion also notes a sharp increase in accounts receivables (money owed to BLI by their customers) which they claim is also a red flag.

Report excerpt on BLI accounts receivable.   Credit: Scorpion Capital
Credit: Scorpion Capital

When it comes to revenue mix, we see services and projects are becoming increasingly meaningful over time while product revenues remain flat.

Chart showing BLI's product revenues flat for 2 years with services increasingly plugging the hole. Credit: Scorpion Capital
BLI Revenues Mix – Credit: Scorpion Capital

We could continue to analyze the report’s findings, but we’ve seen enough. Activist short investors really stick their necks out when they make bold claims like this, and it’s likely that months of research went into Scorpion’s report. Where there’s smoke, there’s fire, and our original thesis has been called into question enough that we’re sufficiently convinced it’s time to purge Berkeley Lights from our portfolio and utilize our limited research resources on other stocks with less drama and consequently less risk.

What if We’re Wrong?

We cannot make decisions without conviction. If later today, ARK Invest issues an alert saying they went all in on BLI, and Scorpion Capital eventually is found to be guilty of libel, we’re not reversing our decision and buying back in. If Berkeley Lights hits two record quarters this year, and shares surge past their all-time high of $113.53 a share, we’ll live with it. We’re not going to second guess ourselves, we’re going to move our focus elsewhere and that’s final.

What we can do is try to learn from this. Here are the three major mistakes we made when analyzing and investing in Berkeley Lights.

  • We didn’t understand what they did and all but said so – “The company uses lights to sort cells using semiconductor technology, and that’s about the extent to which we understand their technology.”
  • We failed to initially identify customer concentration risk and monitor it over time
  • We paid far too high a valuation for shares – This has since been addressed with our adoption of a simple valuation ratio

Regarding the first bullet point, the same can be said for other companies we’re holding. For example, could we really explain in detail how Schrodinger helps companies develop drugs quicker? Or explain the intricacies of the 10X Genomics platform? Probably not, but the difference between these two examples and Berkeley Lights comes down to adoption and revenue growth.

  • Adoption – A lack of customer concentration risk shows that many companies are adopting the platforms
  • Revenue Growth – Strong revenue growth shows that these same customers are using the platforms

Berkeley Lights has neither right now.

Conclusion

We’ve consumed a meaningful amount of time poring over Berkeley Lights, from before they decided to IPO until today. Every time the share price fell off a cliff, we quickly moved to research why. It’s the sort of investment that wastes a lot of time, and it seems that will continue to get worse. We’re selling Berkeley Lights because our original thesis has changed, and we feel that the opportunity cost of continuing to cover BLI in the face of today’s newly emerging drama is too high.

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13 thoughts on “Why We’re Selling Berkeley Lights Stock
  1. Cant fault your reasoning on BLI.

    I went back and looked at all the Scorpion Capital Short Calls. From a historic and long term perspective they have not been 100% accurate over the longer term. It would be interesting to hear your perspective on the Scorpion Capital short calls and how effective they have been. It would be refreshing to turn the tables on short sellers and see if their track record holds out under scrutiny.

    1. Appreciate the feedback Abraham.

      We dismissed a majority of what the report had to say because we don’t want to start going down the path of focusing on the messenger. We stuck with the factual data that triggered our own red flags of which we outlined. Companies like Scorpion Capital or Citron Research don’t have perfect records (Citron made several calls on NVIDIA that proved wrong so far).

      That’s another thing to consider. What time frame do we use to decide if something is “right” or “wrong” on the short side? We’re looking to hold stocks for a decade or more, but it seems unlikely these short sellers will actually hold their positions open to zero.

    1. Did you even read the above piece? The majority of the Scorpion report was ignored and excused away. The conviction is based on factual evidence that triggers red flags listed here in our methodology: https://www.nanalyze.com/2021/09/selling-berkeley-lights-stock/

      The report – whether truthful or not – was damning in and of itself. What must Berkeley Lights customers be thinking right now? This stock is extremely volatile now. Volatility equals risk. We’re out.

    1. You may want to take the time to articulate yourself in a manner that makes us take you seriously. When you write a half-assed comment like this accusing us of “pumping the stock,” it’s immediately clear you have zero clue what you’re talking about. The only person whose reputation is getting tainted in this exchange, Mike, is yours. You want to try again?

    1. An ARK analyst posted a rather wishy-washy response to the whole thing on Twitter, yet Berkeley Lights still hasn’t come forward with a public response. They need to do that to assure investors.

  2. ARK comments on Berkeley Lights (BLI):
    “Berkeley Lights (BLI), a life science tools company focused on the high-throughput phenotypic analysis of single cells, fell roughly 19% on Wednesday in response to an anonymous short-seller report. As explained on Twitter, we believe the report’s author(s) have little understanding of the molecular biology relevant to Berkeley Lights. Moreover, during recent conversations with Berkeley’s customers, we and others have received feedback that contradicts the short report’s contentions completely.
    ARK believes that Berkeley Lights’ technology has a broad and unique set of features vital to the rapidly growing fields of biologics, cell therapy, synthetic biology, and drug development. We intend to publish more insights about the Berkeley Lights’ technology and growth prospects in the weeks ahead. ”

    ARK keeps buying BLI. Yesterday BLI was +15% ..
    We need to be aware the case about Berkeley Light is still developing. At this stage I don’t know if ARK is right or wrong ..

    1. You’re exactly right. At this stage, nobody knows who is right or wrong, what’s up or down, what’s true or false. And in the face of these many unknowns, it’s best to cut bait and fish elsewhere.

      It’s quickly turning into a soap opera. ARK posts some banter on Twitter and then mentions some report someone else wrote which can’t be found. What about Berkeley Lights responding to these accusations? The whole thing is a volatile mess now and it’s time to move on to bigger and better things.

    2. We stand corrected. It looks like BLI did post an 8-K the day after that report with a brief response. Here it is:

      “Berkeley Lights Statement

      We have strong and continued confidence in our business, technology, customer relationships, and the value we deliver. The Berkeley Lights technology enables our customers to find the biology that cures disease.

      The report from Scorpion, a self-proclaimed short seller, contains highly misleading statements, groundless claims and a clear lack of industry understanding. It’s important to note that Scorpion never reached out to us prior to the publication of their report. We believe the sole purpose of the report was to serve the short seller’s interests at the expense of Berkeley Lights shareholders.

      Berkeley Lights is well positioned to continue to drive customer success and execute our business strategy.”

      That’s probably the smartest thing to do – say very little about the unfolding drama and focus on execution. What we don’t like is their “it’s important to note nobody reached out to us” comment. We hear that a lot too, and it’s rubbish. Talking to someone at a publicly traded firm who has been coached to talk to the media is an absolute waste of time for everyone involved.

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