Gotham City Research came out with a new report this week giving Endurance International Group a Target Share of $0.00 basically valuing them at nothing. Gotham City Research are an investment company that focuses on "long" or "short" equity positions based on their research approach to investing.
EIG are not the first company to be reported on in this way, and in the case of Gowex the company filed for insolvency just 5 days after a similar report was released, but conversely they were successfully sued for libel in the UK after a different report against Quindell PLC.
For those unaware, Endurance International Group (EIG) currently owns many web hosting brands, although the brands are in distinct groups with each group having its own management structure, servers and support.
As of 31 December 2015 EIG had about $1.1 billion of debt, against reported revenue in the last quarter of $175.2 million and $62 million EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization).
As you can imagine, once the report was released the share price in EIG fell (as much as 27 percent just this last Tuesday), and you can see the 5-day chart below showing the clear fall coinciding with the release of the report:
Given that Gotham City Research just said that the company is effectively worth nothing, it is little wonder the report has investors spooked. The cynical people among us would wonder whether the research company hedged their bets against the falls, especially as they feature a disclaimer that says:
You should assume that as of the publication date of this report, GOTHAM CITY RESEARCH LLC stands to profit in the event the issuer’s stock declines.
With that in mind, and with a possible incentive that this report aims to drive down the share price for profit, is there any basis to the report? Let's take a look.
The Accusations in Brief
Gotham City Research "Claim":
- EIG Shares will go to $0.00 per share due the EIG being unable to service interest payments on its debt.
- Recent years' reported EBITDA benefited from attracting Blinkx-like revenue i.e. from spam, malware and even terrorism.
- EIG profits at the expense of insufficient expenditure on infrastructure \ investment \ staff causing services outages, poor customer service etc.
The report, some 61 pages long, goes into some detail clarifying the basis of its opinion providing an array of sources from Review websites, tweets, as well as the comparison of expenditure between EIG and GoDaddy. It makes an incredibly interesting read, although even our basic knowledge of EIG reveals that some of the research and opinion is dubious at best.
When reading the report, you should have in mind that EIG works by buying up new brands rather than developing new ones itself. You have multiple Management teams within EIG each responsible for multiple brands, and even we will admit some are much better than others. Sure, EIG does seem to be going through some issues with support on some brands (i.e. Hostgator, Bluehost, Hostmonster, Just Host), but they seem to target A Small Orange in the report, which is actually quite good. It is as if they don't really understand all the different brands and how they fit together. That being said, yes, some EIG brands are not the best you will find!
With regard to financial aspects, it is not really for us to provide an opinion one way or the other. Certainly, Gotham City Research claim that some major customers or related entities were controlled by the company itself, and taking Business Insider's summary:
- EIG CEO Hari Ravichandran and/or immediate family were and/or is a director and/or owner of related parties, Glowtouch Technologies, and Innovative Business Services.
- The transactions are material to EIG, as the transactions have accounted for at least 16.5 percent of 2012-2014 EBITDA.
- EIG's payments to Glowtouch account for most of Glowtouch's revenues.
You can read the full report below:
In response to the report, EIG issued a statement saying that:
The claims in this 'report' are baseless and not rooted in reality. The reality is, since going public, Endurance has beat expectations every quarter, showing consistent growth throughout the company. Endurance senior executives still own a significant stake in the company and are deeply invested in its future success. To suggest otherwise, is ridiculous.
Endurance is transparent in how it calculates all of its metrics including its average revenue per subscriber, subscriber counts, organic growth and monthly revenue retention. The company has always been clear in its financial disclosures and reports on its financial health and growth. KPMG serves as Endurance's internal auditor including auditing Sarbanes-Oxley controls. BDO serves as the company's external auditor.
As previously disclosed, the company's free cash flow for operations in 2014 was $143 million. Additionally, Warburg Pincus and Goldman Sachs own more than 40 percent of the company. Endurance has never interacted with Gotham City Research or the unnamed analyst who authored this report."
Gotham City Research Response
In response to EIG's statement, Gotham City Research issued a follow-up report rebuffing each of the points mentioned above:
As you can see, there are clearly two very opposing views, and it is very difficult due to the technical nature of the claims whether there is any basis to the report. All we know is that EIG have some rather interesting arrangements between companies "related" or "in its control". As with many hosts, some of EIG's brands are not the best when it comes to support, and there are claims of "creative" reporting.
On the other hand, we have a company who makes its money by producing reports such as this in order to influence share price so it can profit from the fall or rise of that share price. It has been proven both right and wrong in previous reports relating to other companies.
We are afraid you will have to take your own view on this, but we would urge you definitely not to jump to conclusions here.