NEW YORK, June 26, 2019 /PRNewswire/ -- Kerrisdale Capital, a private investment manager, has published a report explaining its short position in Tucows Inc. (NASDAQ: TCX), an internet services and telecommunications company that consists of two declining internet businesses and a nascent fiber business with high capex requirements and unrealistic profit expectations. Kerrisdale believes that Tucows will report a miss versus consensus 2019 EBITDA and that the stock is worth 50%+ less than the current price.
Ting Mobile, the company's mobile virtual network operator (MVNO) division, has witnessed subscriber declines since 2017, driven by the entrance of well-capitalized cable operators like Comcast (which operates Xfinity Mobile) and Charter. Given Ting Mobile's lack of a triple play offering and subscale operations compared to its much larger peers, Kerrisdale sees no end in sight to customer losses. Additionally, If the Sprint/T-Mobile merger is approved, Kerrisdale believes Tucows' MVNO business will have to shift its network to another carrier like Verizon or AT&T, which should trigger subscriber attrition and worse pricing.
The company's domains segment is suffering from abysmal industry growth. Given the highly commoditized product set of domain registration companies, there is little to differentiate providers other than price. With low growth, price competition, and potential margin pressures from rising registration fees from Verisign, the domains segment should command a low valuation multiple.
To distract investors from the dismal prospects of its legacy divisions, Tucows is redeploying cash flow into its nascent fiber segment, where it delivers home internet through fiber in selected cities. Building a high-return fiber network is so challenging that even Google and Verizon haven't succeeded and are scaling back. A small operator like Tucows has little hope. Management's assumptions are unachievable, and we expect Tucows will have higher capex requirements, lower penetration rates at maturity, and profit will come in much lower than expectations.
Combined, these businesses are not worth nearly the $730m they're being valued at by the market.
"The market is completely misvaluing this mix of low quality businesses," said Sahm Adrangi, CIO of Kerrisdale Capital. "Tucows' ill-fated adventure into fiber will end badly, and the market is ascribing far too much value to this highly speculative division that has destroyed so much capital in the past for far larger peers."
Kerrisdale's full report can be found at https://kerr.co/tcx.
About Kerrisdale Capital
Kerrisdale Capital Management, LLC is a member of the Financial Industry Regulatory Authority, CRD number 160804.
SOURCE Kerrisdale Capital Management, LLC