ValueClick (VCLK), a Value Stock

by admin on July 11, 2011

ValueClick is a typical stock, offering a great opportunity for growth. ValueClick (VCLK) is one of the online marketing industry leaders–with a fresh line of products and services. The company ranks as the 4th largest ad network in the U.S., just behind the Google Ad Network.

What amazes me about ValueClick is that they have been able to compete with Google and build a very competitive online ad network where publishers and advertisers trade ad space, based on affinity and common interest.  The name of this fabulous ad network is Commission Junction.

Commission Junction is one of the largest affiliate networks in North America and operates worldwide.  This is an incredible achievement for a small company competing against two tech giants  who are fighting for a share of the same market: Google GOOG (134.04 billion), and Microsoft (225.75 Billion). The market capitalization of ValueClick is just 1.38 billion. ValueClick’s revenue is generated primarily from the United States, with just 19.6% (excluding interregional eliminations) generated from operations outside the country, including Europe, China and Japan in 2009.

ValueClick could be a great asset for any player interested in competing with Google for a share of the display advertising business. My guess is that ValueClick will become a very potential target acquisition for a company like Microsoft or Fox.  Even though Microsoft failed with a similar acquisition (aQuantive) few years ago (May 2007), they may try again at any point. Microsoft Ad network is still very weak and undiversified; they are still not willing to give up the fight against Google, so a move like this would make perfect sense.

When Microsoft tried to buy aQuantive, the company was in negotiations with ValueClick for a merger, but the deal fell apart when Microsoft pushed through its offer. Microsoft finally acquired aQuantive for 6B but never did anything with it.  This is considered the biggest failure of Microsoft in recent years, and probably in history.

As the online marketing industry matures, big media and technology companies will have to look to companies like ValueClick.  The shifting of advertising money from traditional media to online is a reality, and is still growing year every year. U.S. users spend 12 hours per week online, which represents about 32 percent of their media time. However, online advertising makes up only 13.6 percent of advertising spent in the U.S.  Recently, Alterian ran a poll which illustrates the industry’s increasing awareness of the fact that traditional media channels just don’t deliver the results they used to. 40% of respondents anticipate a shift of over a fifth of their budget towards digital channels, with 21% of respondents predicting more than a third of their budget will shift.

Forrester Research adds to this sentiment, stating, “Empowered consumers today expect a customized, interactive brand experience that goes way beyond a 30-second television spot or two-dimensional print ad.” Forrester expects interactive marketing/advertising channels to grow to nearly $55 billion and represent approximately 21% of all marketing budgets by 2014.

I doubt ValueClick will continue being an independent company over the next 5 to 10 years.  It could be a great asset for a big media or advertising company, as this is exactly what happened to Doubleclick when it was acquired by Google in 2007.

For the last 6 consecutive quarters, ValueClick has surprised analysts with its expected earnings (source: Zacks Investment Research) and I honestly don’t think the trend will reverse any time soon. ValueClick’s third quarter 2010 results beat the Zacks consensus estimate. Revenue, earnings and adjusted EBITDA exceeded the high end of management’s expectation. The company expects a double-digit growth in the fourth quarter 2010 and full year 2011.

For instance, ValueClick is the company that manages the publishers for LendingClub, the #1 P2P lending platform in the U.S., and one of my favorite sources of investment, other than stocks. ValueClick has built relationships with over 4,500 advertisers and agencies assisting them in their use of the Internet to create awareness, attract visitors, generate qualified leads, and drive sales. ValueClick is especially strong in the financial arena. They actually own one of the most popular sites in investment glossary: www.investopedia, I’m sure if you are in the world of investing, this is one of the sites you have frequently used. The growing display-ad trend in the U.S, along with synergies from Investopedia acquisition, share repurchases, impressive cash flow, and a debt free balance sheet are all positives.

Even though the company currently trades just above its intrinsic value, it still a great investment and gives an opportunity for growth.  The revenue of ValueClick has increased eightfold from $62.55 million in 2002 to $230 million in 2010, attributable to an organic revenue growth and a record number of contracts signed in the last three years. Internet retailer statistics have confirmed the popularity of affiliate marketing, with 75% of the top 500 retailers using third-party affiliate marketing providers.  63% of those who work with third party affiliate marketing partners chose Commission Junction more than all other affiliate marketing providers combined. According to eMarketer, VCLK s banner and rich media display, lead generation and email categories are expected to grow at a CAGR of 11.4% from 2009 to 2014. ValueClick currently reaches 70 million unique Internet users in the U.S. each month and reaches approximately 120 million users worldwide.

Finally, ValueClick has been shown to generate solid operating cash flow. In 2010, it generated $96.9 million in free cash. In fact, the company has generated over $95.0 million in free cash flow in each of the last five years. It has a strong balance sheet –with $197.0 million in cash, cash equivalents and marketable securities (including current portion) and no long-term debt as of 2011. The EPS has grown constantly from $0.15 in 2009 to $0.21 in 2011.

If you take the current assets for the company (302.5 M), you would be able to pay total liabilities of 140.9 M and end up with a lot of cash. This is just a sample of how strong the financial position of ValueClick is.

ValueClick is one of my favorite companies in the online marketing industry, and one of the ones with the brightest future,  In May 2011,  the 50-day simple moving average crossed above the 200-day simple moving average.  Another technical indicator that tells me that this is the time to get a position on ValueClick.

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