Blinkx – more market abuse in AIM stocks?

The Blinkx share price reached a peak of 218p on the 6th January, but yesterday (30/1/2014), it closed down 33%. At one point it was as low as 90p. This followed the publication of a blog post by Benjamin Edelman under the heading “The Darker Side of Blinkx” which attacked various aspects of the company’s operations.

Blinkx sells advertising linked to on-line videos, supported by a video search engine (it originally spun out of Autonomy). Edelman, who is an associate professor at Harvard Business School and specialises in internet matters, published his blog on the 28th January. It is quite a long one so only a brief summary will be given here. His prime focus is on possible inflated measures of “views” of Blinkx’s advertising videos on which basis advertisers might be overpaying.

He attacks the company’s links to Zango from which Blinkx acquired some technology in 2009 (surely an eon ago in internet terms). Zango was known to be associated with deceptive advertising technology. He also raises the issue that a “weather alert” app is apparently linked to Blinkx but there is no clear ownership statement on it. But he does not seem to have bothered to ask the company any specific questions on this issue.

Edelman complains about Blinkx not disclosing more details of the assets acquired from Zango and what continuing use is made of them, including splitting them out so that “the results of the ex-Zango business could be reported separately”. The company apparently integrated those assets into its main operations as reported in the 2010 financial statements. Comment: it seems very odd that anyone could expect a company to report separately on a relatively minor acquisition, and it would be impossible if the business and staff had truely been integrated as the company claimed.

Edelman also discusses the acquisition by Blinkx of Prime Visibility who were linked to a business called “AdOn Network” which is allegedly associated with adware installed on users computers and other disreputable activities. Edelman links this to a jump in the use of the blinkx.com video web site in 2013 and suggests it might be fictitious traffic.  Again there is no specific evidence provided however.

Edelman also complains about the quality of some of the material Blinkx presents and how it is presented, plus reports that Vindico indicated a low “viewability” rating for Blinkx video ads (in comparison with major media channels CBS and MSN).

Finally he compares the revenue per employee at Blinkx with other allegedly similar companies (Tremor, YuMe, RocketFuel and Criteo) where Blinkx is approximately double the others. This leads him to question whether Blinkx’s employees are really “twice as productive” or whether it is because of “short-term profits in adware, forced-visit traffic, and other black-hat practices”. He then goes on to complain that Blinkx does not explain exactly how it makes money.

The Company’s Response. After the abrupt decline in the share price, the company published an announcement (unfortunately no doubt delayed until the afternoon because the company’s staff are based in California) which said “Blinkx strongly refutes the assertions made and conclusions drawn in the blog post”. It also confirmed that “Fiscal Q3 trading was in line with management expectations”.

Citigroup, the company’s joint broker, also made some comments which were “Our view: Reaction Overdone” and they suggested that “Blinkx’s business model is no more unusual than that of many ad tech companies” – see the FT.com web site for details.

Analysis and Comments: Edelman does not appear to have asked the company how it makes money, although the company might not wish to disclose as much detail as Edelman would like for obvious commercial reasons. But it is worth noting that the company is generally very open with its communications. Indeed ShareSoc commented on the live web cast of its results in May 2013 (see our June newsletter) which anyone could dial into and ask questions. In addition they run a very well attended AGM which lasts half a day including presentations. Any complaint that the company is being over secretive is surely dubious.

As regards the comparables to other companies, all companies are different and in the internet/software areas there is usually significant differentiation between the business models, markets attacked, the partner arrangements (often key to revenues), the size of the networks, etc.

Most of the other allegations are based on supposition or innuendo with few hard facts. Citigroup make the additional point that all Blinkx ad impressions are verified (including by third thirties). It would seem odd that advertisers would continue to pay for such advertising if they did not see good results from it.

A Link to Shorting? It is known that Blinkx is a stock that has been shorted of late. One can perhaps see why if you look at the financial fundamentals. A share price of 218p would have implied a forecast p/e of over 50 or a market cap of more than 5 times revenue (although those are not particularly exceptional ratios for high-tech companies with the revenue growth being achieved by Blinkx).

One oddity about Edelman’s blog post is that he says that some of it was prepared “at the request of a client that prefers not to be listed by name”. Now this is most peculiar. Folks who commission research into companies usually want to keep it to themselves.

Is it possible that the commissioner is one of the shorts? Indeed Edelman says that if he traded the companies he writes about, he would be “short Blinkx”.

This case looks very similar to the situation that arose a few weeks ago at Globo. Another internet  software company that seemed to get rather ahead of the fundamentals after the share price zoomed up. It then became the target of attacks of a similar nature – suppositions discussed, uncomparable companies compared, the basic revenue models of the company called into question and similar tactics. Again with very little firm evidence being supplied. But the investors panicked regardless, or as one of them said to the author in the case of Blinkx, there is surely no smoke without fire.

ShareSoc published a lengthy article after the events at Globo and on the abuses of blogs and bulletin boards, where dubious and unverified information can be published. It’s very easy to demolish the reputation of a business if one has a mind to do so particularly those operating in new and complex technical areas and where the author has limited knowledge of the company’s operations.

Surely when shorting is also involved, the possibility of “market abuse” by traders needs to be examined.

Roger Lawson