In a scathing new report, private investment firm Kerrisdale Capital, lead by CIO Sahm Adrangi, has revealed that internet marketing company QuinStreet could be skirting clients with fraudulent web traffic and unethically driving up stock.
The 38-page report outlines the company’s questionable recent practices, cites conversations with former employees and highlights why the company might resort to such measures.
QuinStreet has been a publicly traded company for the past eight years, but in the report’s findings, over the last eight months, shares have quadrupled. “Fueled by a frothy market and a reversal of its longstanding trend of declining sales. QuinStreet now trades at a sky-high multiple of 60x operating profit,” the report states.
Kerrisdale Capital, a hedge fund investment manager, “is best known for its short activism, which involves sharing research on companies that we short,” its founder and chief investment officer Sahm Adrangi told Which-50. “Our research seeks to correct broadly held misconceptions about these companies’ fundamental business prospects. We share our research on our website, third-party investing-related sites, and on Twitter.”
And when recently looking into QuinStreet, the company was confused as to how share prices could increase when the company had not only historically low stock prices, but was working with antiquated technology that investors steered clear from.
In their findings, Kerrisdale Capital suspects QuinStreet which is essentially a digital marketing firm that works by funneling potential leads from niche sites directly to advertisers — was faking leads. “We believe the uptick in revenue is a sham: a mix of malware redirects, bogus leads from web surfers trying to score ‘swagbucks,’ and a one-time lucky deal with Progressive that has already plateaued.”
The news comes as QuinStreet releases its preliminary 3rd quarter Fiscal estimates for 2018, saying they expect to bring in over $115 million after over 45% year-over-year growth. In response to the report, the company released the following statement (in part).
“We have reviewed the negative report published about QuinStreet by Kerrisdale Capital Management and feel compelled to respond given its invalid claims and conclusions, and its negative impact on our stock price…QuinStreet’s business model and relationships with clients are based on the performance of our marketing and media programs for them.”
But, one of the biggest criticisms by Kerrisdale Capital was that “almost a quarter” of the company’s revenue is from the auto insurance provider Progressive. On top of that, because the rest of the traffic could be fake, Kerrisdale Capital is speculating investors could take notice soon.
The other big revelation from the report comes from the QuinStreet management. The researchers from Kerrisdale Capital found that the QuinStreet ‘insiders’ like their CEO and CFO have already begun selling their stock in the company. “Even giving QuinStreet the benefit of the doubt for its suspicious traffic, bad management, and weak long-term competitive advantage, its stock price should only be ~$5-7 –roughly 50% below the current levels.”
After the report was released this week by Sahm Adrangi, QuinStreet shares fell 17-percent.
On top of the recent revelations, QuinStreet does have a checkered past. About a decade ago, the company was embroiled in a multi-state scandal for its business practices that targeted military veterans with alleged ‘deceptive recruiting practices’ for clients of a for-profit school. The digital marketing firm denied the allegations and nothing came of it after that.