How I found a Red Flag and Avoided a 20.5% Loss

On October 20 of the current year (2021), a french company named Atos, was going to report Q3 earnings. For a more than a year, it had been my main or only investment. I was all in with leverage through options and ready to hold through earnings. Being on charge to cover Atos at Unflagged Research, I invested more than 1000+ hours researching the company. I even visited Atos Switzerland Headquarters in Zurich and reviewed all of Atos business operations (More than 100 finalized, offered and already delivered solutions). The result: I was hyper bullish. On July 23 of 2021, an article I did was published on our Unflagged Research website. In it, I explained my bullish thesis and released on Atos a price target of 800€ for July 2024. Atos shares were at 39.8€ back then. 

However, on October 14 (6 days before Atos Q3 Earnings) we issued an urgent update on our rating. We halted our price target and recommended liquidating any Atos shares being held. This sudden turnaround was because I personally found a "red flag" that suggested Atos management team may have been pumping Atos' stock price in advance of Q3 earnings through news flow. After more than one month since that happened, the stock is down about 20.5% and the CEO resigned. But wait, there is much more and it gets way more interesting. 

To explain this whole situation as best and as quick as possible, this article will be divided into three segments: Red flags found before earnings, our unchanged interpretations of those red flags and the evolution of those red flags since we halted our target price. 

We will probably never know for sure, if Atos' management team was pumping the stock's price in advance of the Q3 earnings. However, it is a fact that Unflagged Research halting its, 2000% upside, price target for Atos, 6 days before Q3 earnings and a following 20.5% decline on Atos' valuation wasn't a result of "rolling a dice". Instead, it is the product of careful research that is focused on every detail publicly available. It's impressive how the red flag was detected and reported at Unflagged Research only hours before the company made that mistake. Moreover, it was when the Euronext market was still open, therefore allowing any of our followers to read our article and decide if it was a good idea to liquidate when Atos' stock was up 4% intraday on the news released. If may be wrong, but I think the market completely missed that red flag. We are happy that article turned out to be so helpful. Now, let's review what happened. 

What were the Red Flags?

We contemplate here 3 red flags. One being the most important and the other two being too important to not be mentioned. 

Red Flag 1 (Main Red Flag): The release of "Terra 2" by Atos on October 14

A. Atos released an App called "Terra 2" that was going to be used during the COP 26 summit. The app allows to monitor global co2 levels and other emissions around the globe, displayed in an interface similar to google maps. Reviewing the app, I noted the following. On the setting part, there was an "about Atos" tab. In it, there was a description of Atos that stated it was on the  CAC40 index. However, as our team quickly flagged, Atos had already been excluded from that index, the most important of France, about a month ago on September 17. See what the description said back then in the following pictures:

B. COP 26 was not taking place until October 31. 

C. The App was ok, but some details were not completely polished aside of the wrong description. Some logos were uncropped. It looked to some extent, like the app was not 100% ready. 

D. This was one of the few, if not the only, solution from Atos that is explicit and available for individuals. Usually solutions are restricted to the enterprises who will use it. In more than a year, 1000+ research hours and after reviewing 100 of Atos solutions (all of them), this was the first one I was able to test and research empirically. 

Red Flag 2: News Flow 

A. The amount of news that were shared by Atos was well above what we considered, from our own experience, to be the average. 

B. Most of those news, about 95%, were in our opinion reused news. Mostly updates on past news, like announcing the closing of an acquisition also announced 2 months ago. Updates on what could be considered part of a previous report or solution are also common. For example, reporting one month specs about a supercomputer like "Joliot Curie" news on June 2019 (https://atos.net/en/2019/press-release_2019_06_03/from-9-4-to-22-petaflops-in-2020-inauguration-of-joliot-curie-the-french-supercomputer-dedicated-to-french-and-european-research), then on June 2020 (https://atos.net/en/2020/press-release_2020_06_29/joliot-curie-the-most-powerful-supercomputer-dedicated-to-research-in-france) and finally on November 2020 (https://atos.net/en/2020/press-release_2020_11_12/genci-and-the-cea-pave-the-way-to-exascale-with-atos-and-fujitsus-a64fx-processor). The same happened with the report of two collaborations with "OVH Cloud" that, in our opinion, look pretty much the same. First on January 2021 (https://atos.net/en/2021/press-release_2021_01_26/atos-and-ovhcloud-announce-a-strategic-partnership-to-create-a-trusted-100-european-cloud-solution), then on November 2021 (https://atos.net/en/2021/press-release_2021_11_25/atos-ovhcloud-partnership). 

C. The news set-up and pattern looked, in the whole opinion of our research team, pretty similar to that of March 2021 that preceded a 20% drop in price, on a single day, of Atos shares on April 1st, 2021. That day, it was reported that auditors had issued reserves on Atos accounts, which turned out to be clean months after that. 

Red Flag 3: Limited Impact of Terra App on Atos' Fundamentals 

A. The App was a one-time use solution developed for the COP 26 Summit in Glasgow.

B. The News of the release of the "Terra 2" App worked, in our opinion, mostly as a proof of what  Atos is able to do, but the App did not change the business fundamentally and we don't expect this solution to be particularly easy to extrapolate in the future. 

C. Marketing of the App and the press release announcing it, in our opinion, did not reflect the expected longevity and use cases of this app properly. 

Our Interpretation of the red flags (Personal View)

First Red Flag

A. The description was clearly wrong and at the moment a misstatement by Atos. We think the description was probably copy-pasted by the code developer team of the App, which probably was operating from India. We think that the fact such an error went undetected until release shows either an absence of quality control procedures or simply very bad quality inspection teams working from France. 

B. Given that there was time until COP26 start on October 31 and seeing the App was unready, we identified a chance that the quality control step could have been intentionally skipped if Atos management wanted to release the app before releasing Q3 earnings results on October 20. The app was released on October 14,  the dates match for that theory. We were unable to find any concrete proof that would challenge this theory or prove it unrealistic. It still remained and remains being a theory and a  possible explanation, that is developed after being unable to find an answer to the reason behind this wrong description. 

C. The fact some details, other than the wrong description, were not polished supported the theory that the release of the "Terra 2" app was rushed. 

D. Finally having the chance of personally testing an Atos' solution was the most exciting aspect of this news. However, after seeing the quality of the app and the false claims on the description, I couldn't resist to question: Why am I only being able to try an Atos' solution now? Why only now, after 100 reviewed solutions and after a whole year covering Atos? Why, out of 100 other solutions, is this only just now the case? Not only the timing of the release, but the characteristics of this solution and how different it actually is to all the previous solutions, raised many questions. 

Second Red Flag

A. Given the opinion of our research team that the amount of news being shared by Atos in the weeks before Q3 earnings was abnormal and also considering many of them weren't actually news, we decided to quantify that "feeling" to see if any conclusions could be drawn. We analyzed the amount of news and press releases shared by Atos, on a monthly basis, for the past 2 years. We did the same for the posts on Atos' Twitter and Linkedin accounts. The following diagrams show the results. These diagrams were also released on the explanation of why we halted our price target that was released one day before Q3 earnings, on October 19. 

Third Red Flag

A. From the point of view of our research team, the release of the "Terra 2" App did not appear to be targeting the actual consumers, people attending COP26, that particular day. Instead, it looked like it was targeted to Analysts that were researching the company and drawing some final conclusions on what to expect 6 days later, when Atos was going to report Q3 earnings. We didn't think those analysts were actually aware of them possibly being the target of that unique and once in a year App release. 

B. The press release Atos issued on October 14 to announce the release of the App portrayed the app, in our whole personal opinion, as if the app was going to be used after the COP 26 by individuals and corporations that were not involved with the summit at all. We didn't and don't expect that app to be even easily extrapolated. We think its use will be mostly restricted to the COP26. For those reasons, we found the press release to be very unrealistic. 

Final Interpretation

Although all of these interpretations can't be proven, at least not by us with our current resources, and remain on the "Theory/Speculation" category, contemplating all of them together, made us decide that, in our personal opinion, the risk of stock price, earnings, corporate events and news flow being related on Atos' case was simply to elevated. The risk of this theories turning out to be real had increased too much and beyond our toleration. If those theories were right, they would explain many of the characteristics we found on the "Terra 2" App and its release. Moreover, if true, the theories would suggest that the stock's price was being manipulated to the upside in anticipation of the release of Q3 earnings, what would suggest those results were expected to be bad. 

How the situation ended

The fact that we were sharing an article with a high amount of theories in it, which tried to answer some questions, we were not able to answer with conventional methods, generated us some trouble. Our followers needed, more than ever, to judge what was exposed on that report and generate an opinion by themselves. Many considered the red flags  were interesting and thanked us for pointing them, but ultimately concluded we were overreacting. (Which I personally think we did to some extent, so more than agreed on that point). Sadly, a few other followers didn't find the article appealing at all. One very close follower, who supported our research a ton on Twitter and who was also heavily invested on Atos, reached us through Twitter direct messages. He was furious because our article was pure speculation (this is a fair point too and a completely understandable take that we completely respected and thanked as feedback) and after insulting us a few times and trashing Unflagged Research, he sadly decided to block us on Twitter. If you are reading this, we are more than happy to clear up any misunderstandings of the content we posted on our website and explain any aspect of them deeper if you would like to via Direct Messages. For all of you, we enjoy reading your opinions more than anything and it's the reason we keep sharing our research. If you want to trash us or if you get angry, we don't really mind, just don't block us and let us explain ourselves. 

Overreacting and sharing theories, resulting from our research, that we couldn't prove, was definitely a hard call to make. However, thus far, it seems like it paid off. 

October 14: We halted our price target for Atos and recommended selling at 46.31€, locking a positive return of 16.3%

October 20: Atos reports disappointing Q3 results. Results were not catastrophic, revenue decline stabilized, but still remains at pandemic lows, showing Atos is having difficulties on rebounding. It also shows Atos revenues may have found a sustainable point again and maybe finally stop declining. YoY Q3 revenue was flat. 2021 vs 2020. 

October 20: Together with Atos Q3 earnings release, it was announced that the CEO, Elie Girard, renounced and that a new CEO, Rodolphe Belmer from Eutelsat, was appointed. 

October 20: The news of the CEO replacement maintained optimism high and overshadowed the very disappointing Q3 Earnings. 

November 12: It was announced, by MSCI, that Atos was excluded from global standard indexes under a November review. Most probably, this was due to lack of growth reported on earnings, which was well below expectations. 

November 12: Atos' stock price started decreasing after the announcement by MSCI and after the market started to realize, there was no quick fix to Atos' solutions expected in the short term. 

November 29: Atos' stock price is at 36.93€, about 20.5% below from the day we halted our target price.

Days after Q3 earnings release: The description of Atos on the "Terra 2" App was updated some days after Q3 earnings. It corrected the previous misstatement of Atos being on the CAC40 index. Some of our followers pointed initially that, although Atos was recently excluded from the CAC40 index, it was still on the CAC40 ESG index and that the description was referring to that index. At the moment, we answered and stated we didn't agree, since saying "Atos is in the CAC40 Index" should not be understood as "Atos is in the CAC40 ESG Index". Especially if we know Atos was a month ago on the CAC40 Index, but no longer is. You can see the new and updated description in the following image. Atos apparently realized and corrected their mistake. At the same time, they proved it was, in fact, a mistake and not misunderstanding from our side. 

We will probably never know for sure if Atos management was/is acting on bad faith or not. We couldn't prove it before and we still cannot. 

In any case, the recent drop on equities on Friday because of a new covid variant made Atos valuation drop 4.5% more. Knowing Atos has 100 data centres valued at 1.2 Billion Euros and given that Atos just raised 800 Million Euros about 10 days ago at only 1.8% interest, most of what could have gone wrong, actually went wrong. Looking forward, french presidential elections will take place around April of next year. Although we expect uncertainty generated from those elections to affect french equity markets, we doubt that uncertainty could take Atos' valuation as low as it currently is. In addition, IBM will be spinning off Red Hat in some quarters. Red Hat is a very similar business to Atos and it will bring many new analysts to the space looking for competitors. If Red Hat's valuation on the capital markets results to be from elevated to reasonable or fair, that should boost Atos' current valuation, given that analysts covering Atos will have a new and very similar comparison peer. The presence of Red Hat as a stand-alone company, will probably also heat-up the IT-Infrastructure industry and elevate valuation metrics thanks to the increased interest from investors. Right now Atos' valuation is extremely cheap. Red Hat as a new comparison peer would, at least, push Atos' valuation to a reasonable level. Investor interest in Atos is at historic lows, many investors simply avoid the stock after seeing the valuation drop and drop. 

For that reason, because of stabilized revenues and after a new and because a more specialized CEO has been appointed, we are resuming our Atos rating, but we are lowering the price target to 400€ from 800€. On top of that, we are extending the time frame from July 2024 to November 2026, given that the strategy of the new CEO will take time to be implemented and that time wasn't included on our previous forecast. Fundamentals remain mostly unchanged. Amazing opportunities persist, but the execution needs to be great and actually done. We expect that from the new CEO and we think his experience at Eutelsat will be extremely helpful to continue improving all the solutions Atos already has for the satellite industry. We don't expect the data center business to be sold, since we think controlling manufacturing is a key point for controlling cybersecurity of all of the products Atos offers. Ultimately, it's that where Atos' products become more appealing to customers, since other options just can't guarantee such cybersecurity standards. 

Atos shares are now at 36.93€. 

29 November, 2021.  

UNFLAGGED RESEARCH 🚩