Meme-Stock Traders Embrace Avaya Despite Wall Street Fears
Online traders follow activist investor ‘The King’ and drive big gains in the company’s shares, which had fallen to 65 cents
Individual investors are backing a new underdog, Avaya Holdings Corp. AVYA 10.59% , pumping up the software company’s downtrodden stock by about 200% over the past month and confounding Wall Street professionals.
Avaya’s fans include day traders who congregate on Reddit and Twitter forums, and a 35-year-old software entrepreneur who has snapped up a 15% stake. They are facing off against a group of large fund managers such as Apollo Global Management Inc. APO -4.09% and Ares Management Corp. ARES -2.03% that could benefit if the company seeks bankruptcy-court protection.
Avaya share and bond prices reflect a high risk of bankruptcy, even after the recent rebound. Still, the willingness of individual investors to back the company while global markets tank shows the endurance of the meme-stock trend that fueled rallies for companies such as Bed Bath & Beyond Inc. and AMC Entertainment Holdings in early August.
“It seems naive that anyone would be willing to give them the benefit of the doubt,” said Lance Vitanza, a stock analyst at Cowen Inc. “Our model shows they’re going to be out of cash in June.”
A spokeswoman for Avaya declined to comment.
Institutional investors soured on Avaya, which sells software for corporate phone networks and for customer call centers, this summer. The company issued $600 million of new loans and convertible bonds, then badly missed earnings guidance and disclosed uncertainty about its ability to continue as a going concern. Its stock fell to 65 cents from around $5, and its loan prices dropped by nearly 40% to about 48 cents on the dollar, according to Advantage Data Inc.
The shares started to rebound in mid-August after Theo King, co-founder of cloud software company Faria Education Group Ltd., bought a 15.41% stake and said the market was undervaluing Avaya’s recurring revenue from its 90,000 customers. Mr. King followed up his purchases with a letter laying out a turnaround strategy and some reading recommendations for Avaya’s board of directors. The holdings and the letter were disclosed in an Aug. 23 regulatory filing.
He took to Twitter to rebut a bearish report by Cowen’s Mr. Vitanza and to call out Apollo for maneuvering to potentially take control of the company if it enters bankruptcy. “Lenders should be lenders—not try to become owners,” he tweeted. “Encourage [board of directors] to categorically reject.”
Avaya has announced about $250 million of cost cuts and Mr. Vitanza’s cash burn forecast is “not realistic,” according to Mr. King. Management has several options other than bankruptcy, including finding a strategic partner and consensually restructuring a convertible bond that comes due next year, he said. Avaya announced a first round of job cuts in early September.
The activist campaign got Mr. King a meeting with Avaya’s new chief executive, Alan Masarek. It also galvanized individual investors who pan for trading ideas on social media. Some liked Mr. King’s long-term vision for the company. Others bought in expecting the stock to pop because of a short squeeze, a common investment strategy among meme-stock enthusiasts. The percentage of Avaya’s shares sold short is about 28%, according to S&P Global Market Intelligence.
“This was something special,” said Brad Preuss, a 50-year-old life-insurance salesman in Jacksonville, Fla., who caught wind of the Avaya trade idea on Twitter. Mr. Preuss said he made about $50,000 buying Avaya shares around 70 cents, then selling them when they neared $2 a week ago. The stock now trades around $1.90.
Individual investors might also have rallied because of the involvement of large fund managers such as Apollo and Ares, which are also lenders to AMC. The two alternative asset managers are part of a group with dozens of members, including BlackRock Inc., that has hired law firm Akin Gump Strauss Hauer & Feld LLP to stake their claims against Avaya, according to people familiar with the matter.
“Let’s take Apollo to the moon,” a WallStreetBets poster stated in early September.