The question is, who is going to win? After the market closed on Tuesday Herbalife reported earnings and revenue that beat expectations and raised its guidance, but the conference call on Wednesday was a disaster and sent the shares down under $38. It also released that the SEC was investigating their business since Decemeber (surprise, they listened to Ackman), which was a big drag on the stock.
The difference between an MLM and a Pyramid Scheme
An MLM company is a type of company that relies on small individual sellers to go around to their friends, family, neighbors, and other potential buyers to sell their product to. In this case, nutritional products. There are bigger distributors that buy the product in bulk and sell it to the smaller distributors (for a small profit). Some of the individual sellers go around and try to make themselves bigger by finding people to sell the product for them, while others keep it small. As long as there is an end consumer, then it is an MLM as there is an actual demand for the product. Now, a pyramid scheme has a make-up that is very similar to an MLM, expect they have no end consumer and thus no actual demand. That is why you see a lot of pyramid schemes selling knifes or kitchenware, because the “idea” is that everyone needs these appliances and anyone could sell it to someone else. But, those who are roped in aren’t interested in selling these things little by little. They want to find other people to sell it for them. And thus a pyramid scheme is born. Now the question is, does Herbalife have end consumers and an actual demand for their products.
The Bear Case
The bear case is that Herbalife is a pyramid scheme and has been fooling the FTC, SEC, and other regulators in the 80 countries it operates in for 32 years. In Belgium (where 0.65% of Herbalife’s sales come from), their court system ruled that Herbalife was a pyramid scheme. Herbalife is trying to overturn that ruling. Bill Ackman is proposing that the added publicity around Herbalife will get the US regulators (where 20% of Herbalife’s revenue comes from) to wake up and sue Herbalife on the grounds that is a fraud. If this is true, Herbalife’s stock price would plummet. Bill Ackman contests that the reason why Herbalife keeps expanding into new markets is because it needs more and more people to bring into its scheme. If the SEC case reveals that Herbalife is a pyramid scheme, or at the very least needs to restate earnings, shorts will win.
