GlassHouse Research Accuses J2 Global Of 'Dubious' Transactions

J2 Global Inc JCOM stock traded higher on Wednesday despite a short report accusing the company of deceptive accounting practices.

Dubious Transactions

GlassHouse alleges J2 has been attempting to mask its declining ROIC and organic revenue growth by completing a number of acquisitions designed to artificially inflate its numbers. GlassHouse says J2’s ballooning goodwill balance is a red flag for investors, and the company is using other accounting tricks to deceive its investors.

“We find dubious liability transactions within the company’s acquisition accounting that lead us to believe future reserves are being artificially created,” GlassHouse said in the report.

GlassHouse said J2 is now in a difficult situation of being forced to continue to make additional acquisitions to maintain the revenue growth Wall Street is expecting.

GlassHouse says J2’s non-GAAP income over the past four quarters is now 134 percent higher than its GAAP income thanks to exclusion of a number of amortization expenses, acquisition costs and stock-based compensation.

Representatives from J2 Global could not be reached for comment at time of publication.

Unqualified Auditors

GlassHouse also said a company of the size and complexity of J2 should be using higher-tiered accounting firms to audit its financials.

“Also, JCOM’s lack of accounting experience in key positions such as its CFO and anyone on its audit committee should raise red flags for their investors,” GlassHouse wrote.

The short seller believes the Wall Street analysts that cover J2 are unaware of the discrepancies between the company’s adjusted earnings and its true core earnings and are unknowingly basing their valuation estimates and price targets on unreliable information. GlassHouse says that, given the lackluster organic growth at J2, its long-term structural problems and near-term accounting issues, investors should stay away from the stock.

GlassHouse has a $24.77 price target for J2 stock, representing about 65 percent downside from its current level. While the stock initially fell about 2 percent when the report first hit Wednesday morning, the market didn’t seem to give GlassHouse’s report much weight as J2 stock traded higher by 2.7 percent to $71.09.

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