Kerrisdale Says Suspicious Business Model Makes QuinStreet A 'Dead End,' Company Says Claims Are 'Demonstrably Wrong'

A short seller questioned the legitimacy of adtech firm QuinStreet Inc QNST's business in a report Wednesday, calling its rise in revenue a "sham." The company's CEO responded by calling Kerrisdale Capital's claims "inaccurate, out-of-context and exaggerated."

QuinStreet stock was down 17.69 percent at the close Wednesday, but was in recovery after hours and trading up 15.88 percent at the time of publication. 

Company: Financials Show 'Continuing Success'

QuinStreet has suspicious traffic generation strategies and a weak business profile, Kerrisdale Capital's Sahm Adrangi said in the short report. 

“In reality, few investors understand how QuinStreet actually does business, given the company’s bare-bones disclosures and scant research coverage,” he said.

QuinStreet’s stock traded at less than half its IPO price for the past eight years before shares more than doubled over the past eight months and trade at a "sky-high" 60x operating profit multiple, according to Kerrisdale Capital. 

“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," Adrangi said. 

In a statement released after the close Wednesday, QuinStreet CEO Doug Valenti said the company's business model and client relationships are based on the performance of its marketing and media programs.

"That means both consumers and our clients must be satisfied for us to sustain our business, let alone grow revenue. We believe that our financial results are evidence of the continuing success of our model and results in media and with clients," Valenti said. 

'Phony, Artificial Click Traffic'

Kerrisdale's Adrangi said an examination of QuinStreet’s web domain showed that its largest source of traffic is a now-defunct fake site, insurancebranch.com. The site is a QuinStreet affiliate, Adrangi said, alleging that much of QuinStreet’s traffic has come from suspicious domain names associated with adware and paid surveys.

“This phony, artificial click traffic casts serious doubt on the quality of QuinStreet’s product and thus its value to advertisers," the short seller said. 

Insiders such as QuinStreet’s CEO, CFO and an early institutional investor have began selling shares, which could signify a coming downturn for the company, Adrangi said. 

In the Q1 preview QuinStreet released Wednesday, the company said it expects to report revenue of more than $115 million, a 45-percent year-over-year jump. 

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