Short sellers flock to Fortnox, a Swedish software company that is on the rise.

Tommy Eklund, Fortnox’s CEO, has redefined the technology industry in a way that few other chief executives have.

Eklund turned a Swedish niche accounting software supplier into a stock-market sensation, whose share value has increased fivefold under his leadership.

Few predicted his performance in 2020. Fortnox estimates that the company has already signed up 2/5 of the 800,000 small business owners in Canada who make up its “relevant market”.

Fortnox, however, decided that its total market addressable was in fact 1.5mn companies, which is more than the Swedish statistical agency had counted.

The discrepancy attracted the attention hedge fund , analysts and sceptical who wondered how Fortnox was able to increase customer numbers and revenue with metronomic consistency, despite trends in economic growth, and a marked increase in bankruptcy.

The company’s valuation is at stake. It was $4.6bn Tuesday, which is 23 times more than forecast sales. This has made the group one of the most valuable software groups in the world, and it’s even more expensive than Nvidia.

Fortnox shares fell by 12.3 percent on the Nasdaq-Stockholm exchange after publication of this article at 4pm on Wednesday. This wiped out $560mn from its value.

When asked how Fortnox had achieved such consistent growth, Chief Financial Officer Roger Hartelius replied that the numbers were “rounded up to the nearest thousand”.

In response to questions, he said: “The number is net and includes new and churned clients as well as new via direct sales or via accounting firms as well as newly founded companies as changes to our subscription products.”

Sweden’s Statistics Agency estimates that there are 1 332,598 enterprises registered in Sweden, including government agencies. Of these, 1mn are sole traders without employees.

Hartelius responded to Eklund’s questions by saying that Fortnox saw its market as 1,5mn organisations. This included condominium associations and sport associations. He said they “were required to manage their accounting and report to tax office”. Hartelius said Fortnox viewed its market as 1.5mn organisations, including condominium associations and sports associations. He added that these organizations “are required to manage accounting and report to the tax office”.

Eklund stated: “We think that most of the businesses in Sweden can be addressed with this approach.”

Some are skeptical. Redburn, a broker, said in a sales report last year: “If there are 20 houses on a private street collecting annual subscriptions does the road need bookkeeping software?” Is it necessary to send e-invoices out? Perhaps not.”

Eklund describes the company’s two-decade history as “a start-up”. It has grown in several areas of business, such as invoice financing, the acquisition of a marketplaces division, which connects consumers to professional contractors, and, most recently, corporate credit cards.

Fortnox wants to reach 4mn users by 2025. This is roughly two thirds of the working population of Sweden.

A popular benchmark for software-as-a-service firms is a combined revenue growth rate and profit margin of at least 40 percentage points. Profit margins are less important if the company is growing rapidly. However, as the business matures, it’s crucial that the margins compensate for the loss.

Eklund has a vision that is more ambitious than the 70 percent metric. The company calls it the “Rule of Fortnox”. The company claims to have achieved this goal for at least the last five years and has exceeded 60% for 11 consecutive quarters.

Fortnox stock has been one of the most popular shorts for hedge funds in the last year. However, some reduced their positions when the share price rose 18% on Valentine’s Day after the announcement that the full-year results beat the market expectations.

Marble bar, a hedge fund based in London, is the only short seller currently publicly disclosed. Other short sellers include London’s Kuvari Partners and CapeView Capital. They have also recently sold the stock, but they either closed their positions or fell below the disclosure thresholds.

Eklund informed investors that the increase in profit margins was due to hiring employees instead of external consultants.

Eklund, as usual, took filtered question on the earnings call, moderated by an analyst without the finance chief. Hartelius stated that Eklund with whom he previously worked was “doing an excellent job on the call” and “our financials were well described in our reports”.

Investors have questioned the quality of these reports in which the presentation and the operating segments of the company has changed each year under Eklund.

The company has now five segments that are interconnected: businesses, accounting firms and core products; financial services, marketplaces, and financial services. These segments sometimes work together to sell.

Toby Clothier, of Chameleon Global which is short Fortnox said: “It’s incredibly complex and I don’t know how to understand it. It looks like a spaghetti junction. Who pays who?

Hartelius stated “our primary focus is customers and products, and the responsibility associated with that is how we’ve chosen to be organized”.

Fortnox has also reduced the disclosure of a company that makes loans to customers based on invoice value. In the annual report for 2023, released last week by Fortnox, the details of the money set aside to cover loan losses are reported as percentages, rounded up to the nearest whole numbers, instead of a decimal.

In the annual report of 2022, for example, the loan loss provision was 0.6 percent. In 2023, this figure was increased to 1 percent. Hartelius stated that the change “applies across all figures in our report due to growth”. The document stated that the Fortnox tax rate effective was 15.8% last year.

Prospects for growth remain a central question. Fortnox’s core customers are small businesses between five and nine people. Sweden’s statistics agency tallied 46,000 small businesses in 2023. This is a fraction of Fortnox’s 536,000 clients.

Hartelius stated that “we are expanding our offering to make it even better for small organisations and we will be moving into larger organisations.”

Fortnox’s rounded number of users remained unchanged from last year. One hedge fund that shorted the stock of the company said, “We believe the Swedish market has been significantly penetrated. The remaining portion consists of sole traders with much smaller revenue opportunities.”

Sweden’s tax authority stated that of the 750,000 sole traders registered, approximately 180,000 had no revenue in 2022. Eurostat’s estimation of the number active businesses in Sweden is comparable to Fortnox’s before Eklund arrived.

Fortnox’s chief executive was personally compensated by Olof Hallrup (chairman of the board, and largest shareholder) for his performance.

Hallrup, a former employee of Visma, was found guilty of insider dealing in Fortnox shares ahead of Visma’s 2016 takeover bid. Hallrup’s purchase was blocked due to competition concerns. He was acquitted in 2018 on appeal and compensated for damage.

Eklund’s company First Kraft granted 100,000 Fortnox call option options with 10 shares per option to Eklund upon his appointment. First Kraft sold 600mn (57mn USD) of stock in early 2023, leaving it with 18.8% of Fortnox. Last month, a one-year agreement to refrain from any further sales expired.

Hallrup leases Fortnox offices through a company that received 25mn in rent last year, more than First Kraft’s r23mn in dividends. Hallrup stated that he built the office as he was “convinced that the company’s development would be significantly enhanced and our profile in the local community would be strengthened” and the rent set at a lower value.

Hallrup’s plan to reward Fortnox’s CEO was a great success. Eklund exercised the options in 2022, at a strike of 20. If he had retained all of them, his stake today would have been worth $7.4mn instead of the $2.6mn he owned at year-end.