The best long/short ideas come from identifying the one variable so powerful that if you are right on it almost everything else becomes secondary.
One of my absolute favourite examples of a pitch is short Chegg (CHGG):
ChatGPT is rapidly stealing new customer share from CHGG and neither the market nor the company has acknowledged it.
That was the whole pitch.
You were seeing it in real time in the data. Clear secular disruption was taking place right before your eyes and yet… no one had fully acknowledged it.
Chegg’s CEO said during the Q4 2022 call on February 6, 2023 that they had seen “nothing” to suggest ChatGPT was affecting the business. He backtracked big time three months later on Chegg’s Q1 2023 call on May 1, 2023, when he admitted that ChatGPT was hurting new-customer growth.
As a result, the stock fell 48.4% in a single day on May 2.
We discuss the evidence that was available, including differentiated diligence using clickstream data, and why the ChatGPT risk was not fully priced in.
More importantly, this example illustrates the core ingredients of some of the most powerful long/short ideas: a variant view with a researchable question and a clear path to getting paid.
We use it to build an important idea-generation framework around identifying “change” and then apply that framework to different examples in the same way a long/short generalist would approach them.
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