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MeetMe: $1.50 Target Price If Advertisers Disavow This 'Den For Sexual Predators'

Summary

We think there is substantial risk to the ~90% of MeetMe revenues that come from advertising because we believe many advertisers are unaware that their ads are listed on MeetMe.

It took us only minutes to find Tier-1 brand ads attached to sexually explicit / drug-related content on MEET’s mobile app.

MoPub (owned by Twitter) has been a major force behind MeetMe’s top-line momentum since 2015, despite our view that MeetMe content violates MoPub terms of service.

We think these Tier-1 advertisers are unaware that their ads are being shown on MeetMe due to the "blind" nature of programmatic ad buying services.

We doubt Tier-1 advertisers would knowingly display ads on MeetMe; if and when advertisers pull the plug, MEET is going to $1.50/sh, with no margin of safety.

Author's note: This article contains graphic content (including references to adult content and drug and drug paraphernalia) that may not be suitable for all readers. Reader discretion is advised.

In the scope of doing research on a publicly traded, US-listed company, it is not very often that you find yourself wondering if Chris Hansen from Dateline NBC's To Catch a Predator is going to pop up behind you, tap you on the shoulder, and ask you whether your family knows what you are "up to". However, after our team's research into MeetMe (NASDAQ:MEET), a company that markets itself as an advertising-driven "social networking" website, we can't help but wonder if we have inadvertently found ourselves on Chris Hansen's radar.

Source: memegenerator.net

While we make the Chris Hansen joke only partially in jest, it is worth keeping that meme in mind as you read through this piece because this is not only a short report - it is an article that brings attention to something we believe is a worthy cause. It is worth noting that MEET has a far smaller market cap than the stocks we normally report on. Readers should view our decision to report on a stock with a sub-500M market cap as a clear sign of our confidence in both the quality and timeliness of this thesis.

As with any name we research, our work on MEET began with trying out the service and researching the company's reputation and legal history.

As we scanned through MEET financial statements and realized that ~86% of the company's revenues are derived from advertising, we fell out of our chairs. When we further realized that dozens of credible family-friendly brands are advertising on MeetMe's website, we were outright appalled.

We found ads on MeetMe properties that included Target (NYSE:TGT), AT&T (NYSE:T), P&G (NYSE:PG), Kimberly-Clark (NYSE:KMB), General Motors (NYSE:GM) and Coca-Cola (NYSE:KO). We reached out to some of the aforementioned advertisers (through their Media contacts) for comment on their relationship with MeetMe. As of publication, only Coca-Cola responded with "Thank you for bringing this to our attention. We are looking into the matter".

These six are only a sampling of the companies we found advertising on MeetMe. There are at least a dozen other household names that we will not mention by name in this report purely because we chose to only name companies whose ads are actually shown in this report.

Later in this report, we included a page of "brand partners" that MeetMe itself lists in an IR presentation from 2014. In other words, there appear to be many other Tier 1 advertisers that are placing ads on MeetMe's app and desktop pages. We did NOT cherry pick these ads - we note that articles published by a bullish Seeking Alpha contributor in February 2016, June 2016, and July 2016 include screenshots of MeetMe's app that include well-recognizable brands (including GM).

To present a balanced case, we think it is important to discuss general issues surrounding social media content upfront. There are obviously unsavory things that are posted all the time on social media given that social media leaves users in control. For example, last year Twitter found itself embroiled in a scandal involving ads on pornography postings. The article included the following quote:

The CEO of one mobile advertising network found it shocking that Twitter still faces this kind of problem. "Our brands freak out at any hint their ads show up in situations like this," the CEO said.

In the same story, a SunTrust analyst is quoted saying the following:

Robert Peck, a SunTrust Robinson Humphrey analyst, wrote a report warning that Twitter ads were appearing near pornography and that brands would pull back on spending if the problem became more widely known. Peck estimated there could be as many as 10 million Twitter accounts dedicated to sharing pornography and that Twitter needs to do a better job of blocking them.

MeetMe partners have also taken issue with MeetMe in the past. For example, from MeetMe's FY15 10-K, we found the following statement relating to AAPL:

On more than one occasion, for example, Apple has rejected our applications because of user generated content and other concerns. In response we devoted additional resources to image review, and changed some of our content allowance policies.

Later on in this article, we provide actual examples of content on MeetMe's network that was a) readily accessible, b) objectionable in nature, and c) includes advertisers that are of the same caliber as those that reacted negatively to Twitter's 2015 scandal.

In our view, there is something else that separates MeetMe from Facebook or Twitter. MeetMe was described by government lawyers as a "tool of choice for sexual predators". Its app was featured in a Wisconsin Department of Justice podcast about protecting kids from sexual predators online.

It was also recently linked to a child sex trafficking arrest from November 2015.

Source: Department of Justice Website

Finally, to help provide context to this entire article, Common Sense Media, a non-profit devoted to helping parents make smart decisions about their children's media viewing, rates Facebook at 4-stars, Twitter at 4-stars, and MeetMe's mobile-app at 1-star (NB: the desktop version, which is now ~10% of the business, is rated at 2-stars).

In this report, we aim to clearly define the reputational risk associated with displaying ads on MeetMe and show that there is obvious precedent for websites such as MeetMe to get "blacklisted" by advertisers. We also show that given the "dark pool" nature of programmatic ad buying, most advertisers are likely not even aware that their ads are being displayed on MeetMe. Finally, we show how MoPub, a company owned by Twitter, appears to have been instrumental in helping MeetMe grow its advertising revenues over the past few years. This is despite us finding plenty of content on MeetMe that we believe violates MoPub's terms of service rules.

It is not as if we are the first to call out the objectionable and "predatory" aspects of the MeetMe "social network". California District Attorneys in 2014 referred to the company as a "tool of choice for sexual predators". In that article, SF Weekly actually refers to the company as a "Den for Sexual Predators". Furthermore, unlike Tinder, which in June 2016 announced that it is banning users under 18 from opening accounts, MeetMe retains a liberal and controversial policy of allowing children 13 and up to set up MeetMe accounts. MeetMe did settle the aforementioned claims with California DAs and agreed to changes to its business model. In fact, in the interest of being fair and balanced, it is worth pointing out that District Attorney Herrera for San Francisco applauded the changes that MeetMe made to its business model when San Francisco settled its case with MeetMe in 2015.

However, just last week, a trial began for a man who allegedly used the combination of MeetMe and Kik in order to lure a woman to her death. The headline risks associated with this company are so glaringly obvious that we think the only reason more people have not caught on is because the company is a ~$400M market cap business that is off the radar and heavily promoted.

Simple Google searches on "MeetMe" that include text operators such as "murderer", "predator", "sexual offender", or a term that gained popularity thanks to an unfortunately named congressman, also show mountains of evidence that tie MeetMe's actual business practices to the smutty underbelly of the internet.

In our view, MeetMe's advertising-oriented business model is terminal and unsustainable, with as much as ~90% of revenues at risk of dissipation. In our view, the questions around MeetMe's business practices are being framed incorrectly.

We think there is only one question that matters in the investment thesis on MeetMe and its ability to sustain as a business going forward, so we pose this provocative question upfront and encourage readers AND advertisers to come to their own conclusion:

Does anyone in their right mind think that Tier 1 brand advertisers such as Target, Coca-Cola and AT&T want to associate their brands with a website that California District Attorneys referred to as a "tool of choice for sexual predators?"

If the answer to that question is "no", then we think MEET's fate is going to be eerily similar to that of a company called FriendFinder Networks.

FriendFinder Networks Stock History:

Source: Bloomberg

We are sure that our FriendFinder Networks comparison is going to immediately elicit screams of bias from bulls on this stock. FriendFinder Networks was the holding company for the infamous "Adult Friend Finder" portal. Some of our readers may still remember Adult Friend Finder. Yes, we know, you ended up there "accidentally", just like you "accidentally" set up that Ashley Madison account…

First, a little history on FriendFinder Networks. FriendFinder Networks, owner of Adult Friend Finder and other similar properties, went public in 2011 under the ticker FFN. For those less familiar with Adult Friend Finder, it was a company that many criticized for having a "larger-than-average number of members who are prostitutes looking for clients".

The company spent less than 3 years public before getting delisted in 2013. We see glaringly obvious similarities between MeetMe and FriendFinder Networks. Based on MeetMe's recent meteoric stock rise, it also appears that investors did not learn anything from the FriendFinder Networks experience.

There is one CRUCIAL distinction between the companies that is worth pointing out. We went back to historical financials and discovered that FriendFinder Networks generated <1% of its revenues from advertising. The bulk of the business was subscription based. On the flip side, MeetMe generates almost ~90% of its revenues from advertising sources. Why is this important? We think the advertising-oriented divergence between FFN and MEET speaks to the point we are trying to make in this article.

Given that FFN generated <1% of revenues from advertising, we view this as an obvious sign that advertisers clearly understood what FriendFinder Networks was and stayed far away from the business. According to historical MD&A in FFN filings, it was not as if FFN did not try to generate advertising revenues - it just was not successful in doing so. On the flip side, MeetMe's 90% of revenues from advertising says one of two things:

Either a) advertisers are OK with MeetMe's business practices and do NOT see similarities between MeetMe and Adult Friend Finder, OR, b) advertisers do not realize that their ads are being shown on MeetMe / are not aware of the nature of the content on MeetMe's web properties.

We can only guess on Item b) given that we have no direct insight into the minds of advertisers.

However, we decided we could address Item a) above by just spending time on MeetMe properties to understand the business model better.

So we asked ourselves - is there any easy way to compare Adult Friend Finder against MeetMe? For example, Adult Friend Finder critics pointed to the existence of prostitutes on its platform. Could we find something similar on MeetMe?

Surely if MeetMe is an above-board and family-friendly place to advertise, then profiles on their platform would not include women who appear to be selling sex, right?

Hmmm…then we need some help explaining the profile we found below on MeetMe:

A Curious Profile "Trabajo En Casa De Cyta Sexo…" ???

Source: Our Screenshot from a Visit to MeetMe App - Pulled 8/10/16

The Friendly Bear can't speak Spanish and had to ask a translator for help with the profile above. Our translator...


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