Summary
Culper Research has published an investigative report on Zeta Global Holdings Corp (NYSE: ZETA), highlighting significant concerns related to the company's data collection practices and reported financials. The report alleges involvement in 'two-way' contracts and a network of deceptive consent farms affecting revenue authenticity and regulatory risks.
Who is Zeta Global Holdings Corp
Zeta Global Holdings Corp is a data-driven cloud platform company focused on consumer intelligence and marketing automation software. The company's core business revolves around collecting "opted-in" consumer data, analyzing it through advanced technology, and selling this data to enterprises to improve customer engagement. It emphasizes growth and value derived from proprietary, fresh consumer data, obtained through platforms like DISQUS and acquisitions such as Apptness Media Group and Arcamax Publishing.
Key Points from Report
Allegations of Fraudulent Revenue Practices
- Zeta allegedly engages in ‘two-way’ contracts with third party consent farms, acting simultaneously as supplier and buyer of consumer data, raising concerns of round-tripping to inflate revenue.
- The report connects Zeta to a DOJ fraud case involving Kubient (KBNT), with probable involvement in round-tripping schemes formed in 2019 before ceasing relations in 2020.
- The company disclosed a critical audit matter related to revenue recognition from contracts where it acts as both vendor and customer, highlighting the prevalence of such contracts.
- Several consent farming partners including Digital Media Solutions (DMS), which named "Zeta: Apptness" as a major customer in bankruptcy documents, showcase the incestuous and circular business arrangements.
Consent Farms and Deceptive Data Collection
- Zeta acquired Apptness Media Group and Arcamax Publishing, companies which run networks of consent farms—websites that mislead consumers with false promises such as job applications or financial rewards to acquire personal data.
- These consent farms reportedly attract massive traffic, with over 158.7 million visits from 85.9 million unique visitors in the last year across at least 40 websites.
- Arcamax operates under the guise of a news aggregator but redirects 74% of its outbound traffic to affiliated consent farms, highlighting deliberate data funneling strategies.
- Class action lawsuits and numerous user complaints corroborate the deceptive practices and predatory nature of these operations.
Regulatory and Market Impact Risks
- The FTC recently charged Fluent (FLNT) and MediaAlpha (MAX) for similar consent farm schemes, placing Zeta at potential regulatory risk given the striking similarities in operational practices.
- Zeta reportedly gained clients abandoned by Fluent after the FTC inquiry, boosting its revenue but also potentially increasing regulatory exposure.
- Historical fraud allegations linked to Zeta’s CEO’s prior company, InPhonic Inc., which faced SEC and FTC charges related to fraudulent round-trip transactions and deceptive consumer rebates.
- Zeta’s valuation is currently high with 7.2x revenues and 51x LTM Adjusted EBITDA, despite concerns the entirety of earnings are drained by $215 million in stock-based compensation.
Activ8 Finance Analysis
Culper Research’s findings raise substantial concerns about Zeta Global Holdings Corp’s business model, particularly regarding the authenticity of its revenue and data collection practices. The entangled relationships in data buying and selling, along with the operation of deceptive consent farms, suggest potential regulatory scrutiny similar to other companies recently penalized by the FTC. Investors and market participants should note these highlighted risks and consider the implications of such practices on the company’s sustainability and valuation. While no direct investment advice is given, careful attention to regulatory developments and company disclosures is advisable.