Summary

Synacor <SYNC> is a timely short because it’s a pump-and-dump stock with an immediate catalyst – IPO lock-up expiration on August 13, 2012. SYNC is a low quality IPO that debuted six months ago at $5/share after its underwriters drastically reduced the initial proposed price of $10-12/share. The stock took off in early May when renowned pump-and-dump operator Jonathan Lebed and his National Inflation Association (NIA) began pumping up the stock using buzzwords such as cloud computing, search and advertising, OTT (over-the-top television) viewing, and most recently TV Everywhere and NBC Olympics. In reality, SYNC is nothing more than a low value, search traffic acquirer for Google.

We believe the stock is currently being manipulated due the low float available. However, next Monday SYNC investors will see a tsunami of shares crashing into the stock when 20 million shares (out of 29.6 million total shares outstanding) become freely tradable. To get a sense of whether SYNC’s VC backers are itching to dump their shares, take a look at recent comments made by the CEO of Rand Capital, an early investor with over 900K SYNC shares locked up:

“There is a tremendous opportunity in Rand's future from the anticipated liquidation of our Synacor holdings, the growth from our new investments, and the opportunities we are seeing in our core portfolio companies.” -- Allen F. Grum, CEO of Rand Capital, August 3, 2012

Link to Rand Capital’s quote and press release: http://www.globenewswire.com/newsroom/news.html?d=10000854

We believe this stock should trade down to $5/share at most based on 10x EV/EBITDA. This is a generous multiple given that a faster growing, higher quality “comparable” InterActiveCorp <IACI> currently trades at 10x trailing EBITDA. We use IACI has a “comparable” because it also derives a large portion of its revenue from Google and it has subscriber-based revenue from Match.com. Unlike SYNC, IACI owns its search traffic through Ask.com and other Internet properties. SYNC does not own the Internet properties from which the search traffic is generated.

What is Synacor?

SYNC provides web portals for cable and telco operators. For example, Yahoo (a competitor to SYNC) provides the start page if you use AT&T/SBC for your DSL. The business model is fairly straightforward: SYNC receives a per subscriber fee from its cable and telco partners and splits the advertising revenue with the cable and telco partners through a relationship with Google.

The problem with the business model is that the revenues are concentrated in SYNC’s three largest customers and the company is heavily reliant on its Google relationship for the fastest growing portion of its revenue. In 2011 over 62% of its revenue came from Charter, CenturyLink and Toshiba, and 56% of revenue came from its Google partnership. We believe the service itself is easily replicable and the technology also seems a tad long in the tooth (similar to InfoSpace in the late 1990s).

The original backers Walden, Advantage Capital, Intel, Crystal Internet and North Atlantic own a combined 55% stake, but they have been involved in SYNC since as early as 2000. We have little doubt these investors will prune this overripe fruit from their VC portfolios when the lock-up expires. In fact, they tried sneak it out in 2008, only to be stopped by the financial crisis. They found another IPO window in early 2012. This time they were undeterred by a hostile reception when their initial IPO price got cut in half from $10-12 to $5. Now with the stock at over $10, why would the VCs not take advantage of a lucky break that Lebed & Company dropped on their laps?

Who are Jonathan Lebed and NIA?

From Wikipedia:

“Jonathan Lebed (born September 29, 1984) is an American notorious for using internet technology to hype stocks. Between September 1999 and February 2000 Lebed made hundreds of thousands of dollars by posting in internet chat rooms and on message boards encouraging people to buy penny stocks he already owned, thus, according to the SEC, artificially raising the price of the stock. The SEC under Arthur Levitt prosecuted him. In 2001 Lebed and the SEC negotiated an out-of-court settlement in which Lebed forfeited $285,000 in profit and interest he had made on 11 trades without admitting any wrongdoing — allowing him to keep close to half a million dollars.”

To read more about Lebed and his newsletter on SYNC, go to http://lebed.biz

NIA is a stock promotion website that exploits hyperinflation fears to pump small mining stocks. Lebed claims to be sponsored by NIA, but we believe they could be part of the same organization.

Here’s an audio recording in which a cofounder claims NIA to be a fraud: http://www.youtube.com/watch?v=XYOclEsKHtc

Since May 2, NIA and Lebed have targeted SYNC as their #1 stock idea. They have been sending daily emails (sometimes up to 4x per day) to their subscribers hyping the potential of Synacor. We note that these emails are quite comical. For example, on June 5 NIA sent the following email:

“NIA would like to explain what it believes caused Synacor (SYNC) to dip $1.27 today to close at $11.13 per share and why NIA believes it will quickly rebound in the days ahead. The small online stock broker that NIA has an account with apparently made up a brand new rule Monday morning that because NIA's position in SYNC was larger than SYNC's average 3 month daily volume, the broker would no longer allow NIA's account to be a margin account. NIA's account was meeting margin maintenance requirements and NIA even offered to deposit additional funds to increase its account equity to an even higher level, but the broker didn't care and without warning it went into NIA's account and sold 53,000 of NIA's SYNC shares on Monday and another 140,017 of NIA's SYNC shares on Tuesday for 193,017 shares total.

In no way did NIA want to sell a single one of these shares that its broker sold. Because NIA doesn't want a single additional share in its account to be sold, NIA today opened up a new account with a different broker and first thing tomorrow morning our old account is being transferred over. Please rest assured that NIA is not selling the rest of its SYNC position at this time. NIA never intended to sell a single one of the shares that its broker sold in the past two days. NIA considers investors who were able to accumulate SYNC on the dip today to be very lucky and NIA hopes to begin accumulating back shares tomorrow.”

How will Synacor make money from TV Everywhere and the Olympics?

The core to Lebed and NIA’s most recent pump thesis on SYNC revolves around TV Everywhere and how SYNC will see tremendous revenue growth from viewers using TV Everywhere to watch NBC’s Olympics broadcast. TV Everywhere is a strategy cable and telco operators are deploying to combat the loss of its video subscribers to Netflix and Hulu. With TV Everywhere, cable subscribers can watch TV channels on computers and mobile devices by logging into their cable accounts.

SYNC provides the authentication services for its cable partners by verifying the subscribers’ ID with the cable operator’s subscriber database. For this SYNC gets paid $0.20-0.30 per subscriber for month IF the subscriber authenticates during that month to watch TV Everywhere. When we asked SYNC’s management about the potential revenue opportunity over the next couple of years, they admitted that TV Everywhere will be no more than 5% of their total revenue through 2013. This is clearly why SYNC guided to a sequential revenue decline in Q3 vs. Q2 in their most recent earnings call. This is no uplift from TV Everywhere or the traffic generated from NBC Olympics.

Risks

We believe the biggest risk to our short thesis is if SYNC can sign up another large cable or telco operator, and thus ramp up revenue growth. There are only a few opportunities available: Comcast, AT&T, Time Warner, Cox and Cablevision. Comcast and Time Warner have their own in-house solutions, and we believe they have the scale to not need SYNC. AT&T’s deal with Yahoo expires in 2014. Even if it were able to win AT&T, SYNC admitted that it would not be able to announce the win until 2014 (if AT&T would allow the announcement at all). Cablevision and Cox also have their own in-house solutions, but Cablevision owns Newsday so they have the incentive to keep their traffic internal. This leaves Cox as the only available candidate SYNC can grab in the near term.