Short seller targets Canadian internet firm Tucows

A New York short seller is targeting Tucows Inc., calling the Toronto-based domain registry company’s valuation “wildly overstretched” due to concerns that it is pumping cash into the challenging fibre space while its profitable legacy businesses enter decline.

Kerrisdale Capital Management outlined its new position on the stock in a 20-page report published on Wednesday. Tucows shares briefly lost more than 10 per cent of their value in early trading, but quickly recovered all of that ground and closed at $78.53, up 0.8 per cent.

The company has three core businesses: It sells internet domains, a mobile virtual network operator and an internet business. Tucows earns 98 per cent of its revenue from the first two, according to the report, but thanks to stiff competition and a changing landscape, Kerrisdale argued both are in danger of growing stagnant.

A small provider, Tucows’s mobile division, Ting Mobile, only leases the networks of telecom juggernauts in the U.S. such as T-Mobile US Inc. and Sprint Corp. to then resell them to customers using a payper-use model. Ting’s client base peaked in 2017, but has seen its organic growth turn negative following the emergence of Comcast’s Xfinity Mobile and Charter, the report said.

Tucows’s domains business, meanwhile, is struggling to display any significant growth — what the report describes as an industry-wide trend. The domains business has held on to a one-per-cent compound annual growth rate in the last three years.

But where Kerrisdale sees the larger concern is with Tucows’s internet business. The company is redeploying cash flow earned from domains and Ting Mobile into Ting Internet, Kerrisdale chief investment officer Sahm Adrangi told the Financial Post, as the “behemoths” begin to pull out.

“The space has been around for more than a decade and no one else is entering it, and you’re as small as they are — you’ve got to scratch your head at it,” said Adrangi, who was born in Vancouver.

Tucows was not immediately available to comment on the report.