SciQuest: The BIG DIP or The BIG SLEEP? by Jon Hansen

Posted on July 31, 2015


SciQuest July 31 15

The following is an exchange I had with a reader on Skype regarding SciQuest’s release of their 2nd Quarter results:

Reader: SciQuest stock took a big dip after the 2nd Qtr results were released

JWH: No kidding . . . as soon as I read it early this morning the first thing that came to my mind . . . its a GAAP report – which is usually not good.

JWH: Looks like Zacks and PI called it . . . while the analysts following SciQuest were trumpeting it has a great investment . . .

JWH: Smoke and mirrors . . .

JWH: Good thing the CEO and CFO sold their shares . . .

Reader: yeah, real “fortuitous coincidence”

Of course not everyone would share these same sentiments (at least not at press time).

For example, consider the position of the analysts about whom I wrote in my July 27th post SciQuest Stock: A falling knife or, a temporary point of resistance before a new high?

Based on their enthusiasm, the company was rated as a 2 on the Zacks Research scale. Once again, and for those unfamiliar with the Zacks Scale, 1 represents a Strong Buy recommendation and 5 a Strong Sell. In terms of my reference to analyst enthusiasm, the 2 rating speaks for itself.

However, and despite popular opinion, the following Twitter exchange with Zacks Research (see below) shows that I am not alone in my concerns regarding SciQuest – although for different reasons:

SciQuest Zacks

Why does this matter? After all, if the stock goes up, or the stock goes down, does it really mean anything as far as existing or prospective SciQuest customers are concerned?

Not directly, but ultimately. This is largely because end-user clients are secondary chattel to those whose interest is tied to a company’s stock performance.

Think of it this way, the company has already raised the money it required when it went public. Once the stock has been sold, all future trading of those shares happens between parties unrelated to the business. Or to put it another way, and based on research[1], the operational cash flow of the business is completely separate. The business’s stock price only affects the business if they need to raise more capital by selling another stock offering.

This doesn’t mean that the company is oblivious to stock performance.

According to another source[2], when a company’s stock price is depressed, raising additional funds can become more challenging and costly. In fact, if the drop is significant, the company may have to borrow money – which in and of itself can present its own problems.

Another factor to consider is that a company’s executives likely have a considerable stake in the stock’s performance. This is why SciQuest CEO Stephen J. Wiehe’s repeated sale of stocks raised a red flag for me, as did the more recent departure of the company’s CFO. Do they both know something that the rest of us don’t?

In other words, is Wiehe’s deft use of a 10b5-1 plan “fortuitous coincidence” or, more in line with Bloomberg View columnist Matt Levine’s position regarding the legal use of inside information. Levine’s position isn’t all that surprising, as the use of inside information is fairly common. In an article titled CEOs Boast of Good Results, Then Often Dump Shares[4] , Michael Santoli wrote “insiders always have an information advantage, and often enjoy plenty of discretion over how to ration it out.”

You can review CEO Wiehe’s trades since 2011 on the Market Watch website [3], and draw your own conclusions relative to what it means, or doesn’t mean. Note, use the scroll bar at the right of the Transaction section to track his trading activity.

This brings us back to why both existing and prospective end-user clients should take notice.

For example, what if as reported in today’s Triangle Business Journal[5], SciQuest’s Wiehe is really looking to make an acquisition. Is it true that a near-term deal is unlikely because of the “significant gap between private company valuations and public company valuations” or, is a dropping stock price presenting the kind of funding challenges referenced above?

Depending on why the company CEO feels that he has to be on a “deal hunt”, but is not able to proceed for whatever reason, could pose a potentially serious problem for end user clients. Especially if said acquisition would bolster or improve the current solution offering.

Alternatively, could its dropping stock price mean that SciQuest would be viewed as a bargain, and therefore an attractive takeover target[6]? It is something to consider, especially if the right buyer comes along and sees the benefits of an immediate increase in market share and, also has the ability to dramatically improve the company’s overall solution.

If you are a current SciQuest customer, what might this mean for you. If you are considering SciQuest as a solution partner, in what way will knowing the above impact your decision?

Personally, and at this point, this is only gut instinct based on my past first-hand experiences, something just doesn’t feel right with SciQuest. Only time will tell if my concerns are warranted, and how much my instincts are on the mark.

In the meantime, as the reality of the SciQuest report begins to sink in, we are likely to see an increasing number of analysts move from a buy position, to a hold position.

If you are considering SciQuest as a possible solution provider, you may be well advised to do the same.

take a step back

[1] Does a business’s falling stock price matter? – Stever Robbins Inc.

[2] Ask Matt: How falling stock price can hurt a company – Matt Krantz, USA Today

[3] Market Watch Insider Trades – Stephen J. Wiehe

[4] CEOs Boast of Good Results, Then Often Dump Shares – Michael Santoli

[5] SciQuest CEO talks deals; stock drops – Triangle Business Journal

[6] What Happens to Stock Prices After Acquisition? – Sharon R. Barstow, Demand Media