MI Rewind: Short Selling and Uncovering Corporate Misconduct w/ Edwin Dorsey

24:12So when you have bad concerns about money laundering and all this weird things going on where Roblox is seen as a super safe, kid-friendly platform for an awesome gaming experience, it turns out they have huge moderation and safety issues. They have like a dark web, a legal market for their virtual currency and investors aren't aware of it. One prominent venture capitalist on Twitter is like, oh no, Roblox is a hundred times safer than a thousand times safer than a playground is what he said. It's a thousand times safer than a playground, even though they have like virtual strip clubs for six-year-olds in their game.

24:47It's completely off base and just investors aren't aware of it. And I think it's going to be a really big problem in the future. I have some questions on Roblox. Regarding the virtual currency, is that a crypto or what's going on with that? I don't think it's crypto. I think it's just like your parents pay$5,$10, and their kids get 1 ,000 of these Robux that they can use. I think it's just like other games, virtual currency, but there's a cash out mechanism where you can convert it back to real US dollar. So I was curious if there's these Robux on these other websites, how are you able to get the virtual currency off of the Roblox platform?

25:27That piece just doesn't make too much sense to me. Okay, so you're able to link up your Robux account with these off-site platforms. And then the platforms essentially, in order for you to join, they take control of your Robux account and they can send it to other users. And sometimes it's easier to trade items for between Robux users and not just the currency. So there's these proxy items to represent the currency. There's one called Perfectly Legitimate Business Hat that's worth around 100 US dollars. and you'll see players trading them back and forth between each other when they're really just settling gambling debts done off site.

26:04It's crazy. And this is happening on a platform for six-year-olds. The company's making money off it and they don't want to turn a blind eye because they make money off it. Another example of how terrible this is, there's apps where kids can download it and they watch ads and do nonsense, fill out quizzes, leave fake reviews, and they get paid this virtual Roblox currency, which they use in their games. So there's literally eight-year-olds leaving online reviews like, I'm spending an hour every day watching random ads just to earn Roblox for this game. So there's this entire back market ecosystem Roblox is allowed to be created that they make money off of that investors just don't know about.

26:46Robert Leonard It's pretty incredible how many users Roblox has. You mentioned they have 30 million active users. When you're dealing with that many users, a skeptic of this article would say that the internet has bad actors and any company of Roblox's size is going to have these types of issues. Absolutely. And it always comes down to reasonableness and company representation. So is this just that there's tons and millions, millions of people and there's a few bad actors and I'm cherry picking or is there actually an issue. Well, if you look at some of the people who've been indicted or arrested for inappropriate actions through Roblox, one person was arrested for abusing, getting the child pornography from 150 children.

27:29And that's only enabled by the internet and by a negligent platform. The guy's own lawyer said the case was possibly unprecedented, whereas sex offenders using Roblox to prey on children. In other examples, registered sex offenders sign up on Roblox and buy the currency from Roblox. Roblox is making money selling their virtual currency to people already who are convicted sex offenders. That is a whole nother level of negligence that you probably don't see on other platforms. No one's created this real virtual currency that has like a black market value. No one has a game that's solely targeting young people.

28:04That's one thing. And then the other thing is the company's representations. The company says they monitor every piece, human reviews every piece of content that is on the website and they tell parents we have cutting edge safety technology. They say all romantic gestures are banned. Then there's literal strip clubs in their games. That's showing that they aren't actually vetting. They aren't doing the vetting that they represent to parents they do. So it's one thing if you say we have a platform that's a free for all and hopefully kids will be safe. You know, at least you're accurately representing it, but you can't say you're vetting every item and then not actually vet every item.

28:40Do you know how much they're spending on safety for their platform? I don't know. I'm sure it's like they'll exaggerate and lie and say we have 2 ,300 people. One interesting thing, though, is they also operate in China. And in China, there's a lot of stringency. The government says you can't show blood on screen. The children cannot play for more than an hour a day. You can't show any nudity, any inappropriate actions to Chinese kids playing Roblox. And Roblox is a whole different mechanism for content moderation in China, where they invest a lot there that doesn't exist in the US. So I don't know how much they spend, but whatever it is, it's not enough and they're not confident enough.

29:20Do you know if they've ran into any legal issues around the items you've highlighted? My guess is no. I don't think people are as aware of how widespread the problem is because I think some parents just stop their kids from playing. And I've been in some communities, parents have caught on that there's a lot of inappropriate activity on Roblox. I don't know if it's really been solved through litigation yet. Yeah, it really does come down to that trust, especially from the parents, the law enforcement, and the government. If they lose overall trust in the platform, the company could really run into some issues.

29:55So it'll be interesting to watch play out. And another important thing with Roblox, and one thing I always look at is what is the market valuing at the company. If it's trading at 10x profits and the market knows there's some issues, then that's fine. But Roblox is trading at 40x revenue. It's not currently profitable on a gap basis. It's also a game that's selling really to children. And if you know anything about children online, things go in waves. There's fads. Club Penguin was hugely popular 10 years ago, and it's not even around now. So to me, Roblox is like the modern day Club Penguin with a lot of issues.

30:30In two years from now, it'll be just not as hot. But Wall Street, the men on Wall Street are like, I have a nephew who likes Roblox, to the moon, metaverse play, whatever. But I think Wall Street just has this one so raw. Well, I'm really excited to keep an eye on this one. Let's talk about one of your other reports, Ag Eagle Aerial Systems, ticker UAVS. I've really enjoyed reading this report and it's almost comical. This is essentially a stock that was pumped up because of rumors of a potential Amazon partnership that was just total hype. What I find so fascinating is you wrote this report back in February of 2021, and the stock is now down 90%.

31:14I mean, what a find on your part, and I'm sure many of your subscribers took the opportunity to bet against this one after reading some of the information you found. Aguilarial Systems is a great example of some of the risks inherent investing, especially when you're an individual investor. This company, Aguilarial Systems, claimed they were making a next generation drone that was going to, you know, revolutionize transport and delivery. And then they said, our drone can be used to like monitor marijuana fields and like, you know, use for hemp farmers to like fly a camera. They're just a mess.

31:51And then eventually they say, oh, we're going to do partnerships with major e-commerce developers deliver packages directly to people's houses with our drone. And there's just so much hype, so much passion. The individual investors take the stock from 1 to 15 on this like just management hype. And then you just dig into it. The moment you start digging into the company, everything falls apart. They have like six employees. They spent$400 ,000 in total on research and development. You can't make a next generation technology with that. If you go to YouTube and try to find videos of it, you can find their drone is literally just like a remote control helicopter with the GoPro attached.

32:28It's like, this is just a nonsense company. And you dig more and more into it. And you're like, where did these rumors that like Amazon was going to partner with them come from? Well, like what happened is the chairman's daughter made a video that was private on YouTube that had the Amazon logo and AvEagle Technologies logo next to each other. And then some anonymous person on Reddit is like, look what I found. There's a partnership coming. And then all these paid stock promoters are like, I hear a rumor on Eagle. And it's just all fake. It's all nonsense. And the investment group behind it that gave this company a lot of money to spend on this paid stock promotion is a fund in some obscure European country that had been involved in 10 of these pump and dumps before where every company goes up a ton and then collapses.

33:15And this company got to like a billion dollar market cap, mostly money from individual investors who lost their shirts, even though there was literally no substance there, no revenue, obviously no partnership with Amazon ever materialized. It was all puffery and nonsense. And it's one of those things where if you're an individual, you might say, oh, let me get in early. They're going to have a partnership with Amazon. I think I'm doing real research. I think there's a lot of new drones and they say management is spewing all this nonsense, but there's no substance there. And that's why you always got to go to the source filings, go to the SEC filings, see how much they spend on R &D.

33:52How many employees do they have? Does it make sense that a six-person company with 400 ,000 in R &D actually changed something significant? No. So AgEagle Aerial Systems, just one of the most ridiculous companies out there. Let's take a quick break and hear from today's sponsors. Hey, it's Sean O'Malley, just popping in with a quick message. If you like this podcast, well, I've got great news for you. We've got a handful of other shows for you to explore, from learning about Bitcoin to embracing a richer, wiser, happier lifestyle. Just go into your podcast app and type in We Study Billionaires to find our collection of shows.

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37:29All right, back to the show. I think there's a lot one can learn with what you found from this. This company just screams red flags. It had six employees, spent$40 ,000 on R &D in the past three years, suspicious revenue recognition policy, one undisclosed entity that accounted for 94 % of their revenue. The list just goes on and on with this one. It's just so ridiculous that this was able to happen in a public market for investors. And the thing is, Clay, this type of stuff just keeps happening over and over again, where companies at a billion, two,$3 billion valuation are going public, even though they have no substance.

38:12Another more recent example I wrote about Clay is Embark Trucking. This was a$4 billion SPAC deal that happened like two months ago, I think late November. This trucking company, they're building software to help trucks drive autonomously and their software should be released in 2025. They have no revenue. They have a 25-year-old CEO. And the more and more you look into it, they're going through a stock deal at a$4 billion valuation, but there's just nothing there. All the executives at this company are the CEO's college roommates, and they're all in their 20s from the University of Ottawa. And it's like, wait a second.

38:47And then you look at the one real engineer they hired from Tesla. He left after less than two years, which is a sign something else is like a little off. And you look at competitors, every competitor in this space of autonomous trucking has hundreds or thousands of patents. This company had zero patents. They said they rely on trade secrets. Like, there you know, so we rely heavily on trade secrets. And then they're like, well, we could be sued for violating other people's patents too. And it's so frustrating to see it because it's almost always retail investors who are getting screwed over. Because the CEO of that company would go embark trucking and go on these podcasts, go on media appearances, and would count nonsense metrics.

39:27He'd say, we have 15 ,000 pre-orders for our truck. And then I'd go to the SEC filings, you dig around for two minutes. Well, what is a pre-order for your truck? Well, first, you don't make the trucks. You're just making the software. Second, these are the pre-orders of$500 refundable deposit. And you have partners who are exempt from the$500. So your 14 ,000 pre-orders could be 13 ,000 from your own made up entity that you're exempting. And then 1 ,000 from a real customer who's just putting a$500 refundable deposit down. So you're an investor sitting at home trying to do research saying 14 ,000 trucks, it's like a huge potential.

40:05And then the reality is it's just all nonsense. It's just all puffery and no substance there. And it's really frustrating to see, which is why I kind of have a passion for this, because it's a hurting individual. With all these SPAC companies going public, it seems like a really good hunting ground, especially since it's been in a bubble, what feels like a bubble the last year or so. And a lot of these companies moving down after they end up going public. So I think that's a good place to look for someone like yourself. Absolutely. And Clay, I track these specific sponsors and underwriters. There's one called Early Bird Capital.

40:41I think they've taken 22 companies, SPACs public in the last two years. 22 of those 22 21 are down only one is up and 21 are down and i'm like you know you can have a pretty good batting average if you're just focused on spax so spax are one really fertile hunting ground for me the other place i look a lot are u.s listed chinese companies a lot of chinese companies come to the u.s access their capital markets here and then you know commit fraud or just lie about their business. And you can see a lot of these IPOs just fall 90 % in the first two years after they list. That's another really 40-100 ground.

41:21But SPACs, tons of nonsense going on there. Have you done a lot of research on Chinese companies? I always hear that it's very difficult to find real research to find out what's actually going on behind the scenes in these companies. So it's tough to get really in the weeds if you don't understand the language and You can't go physically to China and visit the factories and do that type of research. I like to do what I call just red flag hunting. Look at a company and see just how many red flags will pop out at once. So I look at the CEO and board and see what other boards and companies have they been involved in.

41:58Sometimes you look at like a$2 billion Chinese company and every board member has been on three other companies that collapsed and the CEO has been on a company that collapsed. And it's like, if you're all associated with failure in the past, then your current ventures like need to be a failure. We touched on this briefly before, but I also look at the auditor. I think for US listed Chinese companies, this can be particularly important because the risk of fraud is a lot greater. I look at the auditor and the specific audit partner who's in charge of auditing that Chinese company. And oftentimes you'll find individuals who only audit fraud.

42:33It's like literally every company they audit goes to zero. And I'm like, oh wait, you have this really like checkered individual in charge of auditing you? Like that's an instant short. One thing that I didn't mention that I do a lot, Chinese companies specifically, is I look at SEC comment letters. This is a completely free thing on the SEC's website. You can search for comment letters, which is informal correspondence between the SEC and a company, usually before they go public, but sometimes afterwards. You'll find a lot of nuggets of really interesting information in those letters. Sometimes the SEC is like, wait a second, your CFO forgot to sign that form.

43:11Why is that? They'll be like, oh, clerical error. It's never a clerical error. It's always like fraud. They're like, we can't understand why these two metrics don't agree. And companies will be like, clerical error, clerical error. It's always just a total fraud and you're making things up. So that's one thing I look for, SEC common letters. Yeah. Very interesting. Switching gears, let's talk about a stock that you are actually long. And you've been very public about this position, and that is a position in Twitter. The stock hasn't done well as of late, like many other growth companies. Tell us what you've been seeing in Twitter and why you like the pick so much.

43:52Clay, I need to disclose, I got the vast majority of my net worth in Twitter stocks. So I'm biased and none of this is investment advice. Everyone should do their own thinking and own research on this. As a user, I love Twitter. It's an awesome platform to learn. It's the perfect discovery tool. As a newsletter author, Twitter is essential for my business and so many other content creators. I get over half my news subscribers from Twitter. Every newsletter gets 50 to 80 % of the news subscribers from Twitter. It's incredible how important it is for any content creator and discovery of information.

44:27It's unique among the social media platforms in that it isn't to me like when you talk about Facebook and Instagram and TikTok. Those seems like fads to me. It's interesting. It's cool. It's something to spend your time or impress other people. But it could totally go away with Twitter. It's like a professional identity and learning tool that will be with you for life. You can use Twitter when you're 16. you can use it all the way up to your 90. Instagram, at least in my view, doesn't have that staying power and durability that Twitter has. I also love the Twitter management. They would always talk about wanting Twitter to be around for the next 100 years, caring about the user experience, caring about moderation, putting a lot of thought and care into these issues, where Facebook is the exact opposite.

45:12Facebook cares about money. Facebook wants to be monetizing like crazy. Twitter banned political ad spending very early on the platform because it was bad for the health of conversation. While Facebook was taking money from politicians of all stripes for a very long time, Twitter hasn't had these safety issues. They've invested a lot in putting public studies out on how to improve the health of the conversation. Facebook just never did that. So I like Twitter because it's this platform that I'm confident will be around for the next 100 years. It hasn't been great at monetizing, but it's going to get better and better in the long run.

45:47Historically, it's just been advertising. Now they have a lot of new features that have opened up new paths for monetization, not just better advertising, but super follows and paying for content you like from top creators, Spaces, which is their live audio product where you can include ads, newsletters, e-commerce is another place they're venturing into where I think they're going to be successful in allowing people to buy directly on Twitter. There's all these avenues for tons of potential that just haven't been fully realized. And the final thing is two months ago, they got a new CEO who's the youngest CEO in the S &P 500.

46:23So Twitter, this remarkably unique asset with 200 million daily active users, just loved by its users, tons of potential. Now you got the youngest CEO in the S &P 500 with incredibly low expectations and a ton of room to execute. This is a company I've seen myself holding for the next 10, 20, 30 years. And I think the market just has it so wrong. It's the ninth most visited website in the world, and it's got a$30 billion market cap. It just makes no sense. One of the concerns for me on Twitter is how effective they'll end up being at monetizing their platform. This is my guess as to why it's trading at a much lower valuation than the other social media platforms because as a business, in the end, it comes down to the bottom line that the company produces when it comes to valuing the company.

47:12Also, when I think of Facebook, they collect all of this data on their users, their gender, age, occupation, income, so on and so forth. I'd be surprised if Twitter collects anywhere near the data that Facebook does. Facebook's ability to monetize their users has just put them head and shoulders above any other social media platform. But now they are running into those privacy issues. So yeah, that's my main concern about Twitter, especially since advertising is their primary revenue source as of today, at least. Clay, that's a great point. And ironically, I'm going to twist that around and say it's a positive.

47:51Because with Facebook, you saw that they've been hit really hard recently because of Apple's privacy changes and starting to restrict what information you get and how much you can target your ads. That's affecting Facebook a lot. Because Twitter was a little bit behind the eight ball in collecting information and never relied on it that much, they're going to be much less affected by this push towards privacy and respecting people's private information. I would say Twitter is just so far behind other companies and how well they can target advertisements and what you can do with the advertisements.

48:21Until recently, you haven't even been able to directly download an app straight from a Twitter ad. Because of that, I think it's almost a good thing. And finally, the market's really pricing this in. Twitter's at like eight times revenue or something silly, where other platforms like Snapchat and Pinterest are at 30, 40x, even though Twitter has the most room to grow. It just never makes sense. I write a newsletter, I get a lot of followers from Twitter, I would happily pay$30 ,000 a year just to promote my newsletter to other people who sign up and pay for newsletters through Twitter. Right now, there's no great avenue for me to do that.

48:57But I know the moment I can, I'm totally going to be willing to do that. So I see myself as an incredibly happy user. I pay for their blue product, which is their$3 a month subscription that just rolled out. They have tons of room to monetize with me and other users. And they have the durability of a tech company that I don't think exists with a Facebook or Pinterest or Snapchat. The censorship or calls for people to leave Twitter, is that a concern for you at all? You know, if you look at all these other Twitter copycats and say, we don't have censorship, they get a lot of viewers and then everyone leaves because it turns out you don't want just tons of craziness just spewing over and over and over.

49:39When you have nothing, then it just all skews to like the crazy zone. And when you have some censorship and it all skews right to the line of like what's censored in terms of virality. I'm a big free speech fan. I think in order to have free speech, you need to have too much. You need to have terrible content. You need to have content you don't agree with. It's just kind of necessary to preserve the beauty of free speech is you need to get the ugly side. They go together. That said, Twitter is a private company. So I think if you have clear policies, and one of the things they did that Facebook's never done is they rewrote their policies to be in plain, clear English.

50:15So all users can like understand what the rules are and abide by them. If you have policies and you enforce them, I don't view it as that much of a business, Russ. Yeah. I find it really interesting that Twitter's rolled out all of these new products. You mentioned the newsletter feature, the spaces, the Twitter blue, the super follows, all these things that have potential for them. Let's dig a little bit more into your newsletter called The Bear Cave. What do you offer with The Bear Cave and where do you see it going in the future? So Clay, the Bear Cave is a newsletter I started two years ago.

50:51Instead of joining a hedge fund when I graduated college, I decided to start out on my own with this newsletter. The Bear Cave does two things. There's a free version where every Sunday, I just recap what's going on in the short seller world. I summarize new activist short campaigns. There's like five or 10 every week. I list all interesting resignations from the last week so you can keep track of executive turnover. I link to interesting articles and I highlight five or 10 interesting tweets. That's in the free version that goes out to 25 ,000 people every Sunday. And then there's a paid version, which costs 44 a month or 440 a year, where I do deep dives on companies that I feel are misleading investors or hurting customers.

51:33So that's Roblox, that's Embark Technology, that's AgEagle Aerial Systems. Twice a month, I write up these roughly 1 ,000 word reports. I need to say, I don't bet against the stock myself. I only make money from paid subscribers. And that's what I do. And it's more popular among journalists, regulators, hedge funds, things of that nature, and just like individuals who like seeing me expose companies. So that's my job. My entire job is sending six emails every month. It works really well. Financially, I'm earning a ton more than I could at any fund. It has ultimate freedom for a 23-year-old. And then another thing I launched recently is a newsletter called Sunday's Idea Brunch, where I interview interesting investors every Sunday and publish a written interview where I ask them about their investment process.

52:21How do you research companies? Well, what are your top ideas? What do you do in the first hour of research? I go out and I find great investors, usually through Twitter is how I approach people. And then the first half of the newsletters for you, the second half is for paying subscribers. But interviewing a lot of great investors has been an interesting experience for me too. Very cool, Edwin. Thank you so much for coming on the Millennial Investing Podcast. For those in the audience that want to get connected with you, where can they go? They should Google Edwin Dorsey and follow me on Twitter or check out the Barricade newsletter.

52:58Yep. I'll be sure to link both of those in the show notes, Edwin. Thank you so much for coming on. Clay, thanks for having me. This has been awesome. All right, everybody. I hope you enjoyed today's episode. Please go ahead and follow us on your favorite podcast app so you can get these episodes delivered automatically. And if you haven't already done so, be sure to check out our website, theinvestorspodcast.com. There you'll find all of our episodes, some educational resources we have, as well as some tools you can use as an investor. And with that, we'll see you again next time. Thank you for listening to TIP.

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