What you need to know

• Short seller Spruce Point Capital Management published a report highly critical of digital advertising verification business DoubleVerify questioning its product efficacy, the quality of its acquisitions and transparency of its financial reporting.
• Spruce Point's position is highly contrarian, most investment analysts are positive on DV, whose stock has performed strongly all year.
• The criticisms have implications beyond just DV into the wider ad verification sector, for instance, changing privacy approaches at Apple and Google are flagged as the top holistic concern.
• It describes four acquisitions as "busts" criticising the quality and financial performances of target businesses.
• The report also suggests price cutting is rife in the highly competitive sector where the market leaders, DV and IAS have saturation coverage already in the top tier.
• And it says the DV product is too complex for the SMB sector, although DV can point to a lot of work it has done in recent years to address that concern.
• As of publication DV has not commented on the report, although it may be addressed in its quarterly earnings call, due shortly.

New York based investment manager Spruce Point Capital Management, which specialises in short selling – betting the price of a stock will fall –  has rung alarm bells over financial reporting at digital ad safety business DoubleVerify (DV) while also expressing what it describes as "grave concerns" about the sustainability of its growth story. Perhaps most importantly, from a customer’s perspective, it has challenged the efficacy of DoubleVerify's product suite.

Spruce Point's report on DoubleVerify - which for short sellers is often the start of a campaign to squeeze target company stock valuations - put a particular focus on the renewed attention on privacy, saying it was the biggest long-term holistic risk the company faces. An unnamed DV insider was quoted in the report as saying: “Apple and Google...if they continue to change their privacy policies, they could make it difficult for them [DV] to get the data to say if its fraud or not."

In the disclosure section of its report, Spruce Point says it would be fair for readers to assume it is short on DoubleVerify (and therefore it wins if DV’s stock falls) and long on DV's competitor IAS (the firm wins if that stock rises).

In the immediate aftermath of the report dropping, short sentiment is winning although it's worth noting the company’s stock has performed strongly all year - the day before Spruce Point released its report on DV, none of the analysts tracked by investment website Fintel had a sell recommendation on the company. Indeed, six analysts rated it a strong buy, 15 a buy and two hold.

At the time of publication DV had not responded to the report but its quarterly earnings call is set for Wednesday and some response is expected. ANZ DV management declined to comment on the report, citing the constraints of a blockout period in the lead-up to the earnings call. 

Counterpoint

Spruce Point released its report last week, triggering a 6 percent cent decline in share value on the day but has drifted in a tight band at that lower level since. Another analyst, RBC Capital, rated the stock as out-perform the the day Spruce Point's pressure campaign started. RBC Capital set a one year average target price of $35.53, a 33 per cent upside on the stock compared to Spruce Point Capital Management's downside risk of 35 to 45 per cent.

Spruce Point criticises DV's reporting and accounting practices relating to international operations and was particularly critical of CEO Mark Zagorski saying that while international growth is core to its equity growth story, it’s also “an area where CEO Zagorski previously failed to deliver growth in his previous role as CEO of Telaria.” (Telaria was a video engagement platform that merged with Rubicon Project to form Magnite.)

The investment analysis from Spruce Point said: “Our research indicates that DV will have increasing difficulty in combating slowing customer growth and margin pressures, thereby jeopardising its ability to meet lofty Street expectations and preserve its industry-leading valuation multiple.“

The investment firm remains upbeat on DV's main competitor IAS (where it takes a long position), saying: ”We believe DV’s competitor Integral Ad Science offers superior value through better positioning to faster growing foreign markets, greater financial transparency and stronger patent protection. As a result, we are long on the stock and see 20 per cent - 30 per cent ($19.20 - $20.80 per share) upside potential as the valuation gap narrows”

Product weaknesses

For DV’s customers, issues about financial transparency may be less important than criticism about its product line-up, in particular a roadmap which includes a number of significant acquisitions which Spruce Point  characterises as "busts", although some of the criticism relates to the price paid rather than product utility. For instance:

• Openslate: Spruce Point says DV paid too much for OpenSlate in Nov 2021 in a $150m deal that included $125m in cash and $25m in stock. It says that by the time of the deal, Openslate’s growth had already peaked. “DV paid approximately 9.1x revenues for a business that appears to have peaked and had lower margins than DV. ”It also references a WSJ article from April 2020 that it says raised fundamental questions on how well independent third party verification services really worked on YouTube.
• Meetrics: Many of the customers DV acquired via the deal which took place after they went public were unprofitable or subsequently lost to rival IAS, claims a company insider. It quotes company executives speaking at the BMO Digital Advertising Summit in March 2022 acknowledging that Meetrics was not as robust as some of its competitors.
• Ad-Juster: After DV acquired the SaaS-based reporting and analytics firm it demonstrated limited to no growth based on advertised metrics, partner and integration listings according to the short seller. It also notes, “Ad-Juster had previously been acquired by a Chinese firm in 2017 and its plan was to expand there. Ironically, DV has never once mentioned any sales or business it has in China.”
• Zentrick: In 2019 DV bought Zentrick, a technology business that provides middleware solutions to enhance execution and performance of online video advertising. However Spruce Point says notes in DV’s own report “reveal that targets were being missed and the deferred compensation accrued liabilities were being revised lower.”

Complexity

Finally, the report says DV is faces a serious challenge expanding into mid-tier and lower markets due to the complexity of its products – although this would hardly be a unique problem for an adtech business.

It quotes an unnamed company executive who it says had seven years experience working with DVs international customers: “SMB clients are difficult to support. It takes a lot of time from a learning curve, to set up in the system, and not worth the effort. … The product is for larger enterprises. The learning curve is too high and too long to track the efficacy for the system.”

Mi3 will update this story tomorrow following DV's earnings call in the US. However, Brian Wieser, the former GroupM global intelligence chief turned consultant, suggested the hedge fund's report should be treated with caution.

“Whether or not they are right or wrong about valuation, product quality and growth trends are beyond the scope of my focus … However, many of the personal, company and industry-level arguments made with apparent certainty appeared to me as either selective, suggestive or in some cases impossible to prove at least without more qualification or more tangible evidence,” he wrote in a note.

Clarification: The original version of the story included general comments by a DV executive about the steps the company has taken in recent years to address usability of the product in the mid tier and smaller markets. We have removed the comment at DV's request prior to the release of its latest financial results, and will repost the comment tomorrow.