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Advertising - Tuesday, September 30, 2008

Finding Some Value in ValueClick

We took the day off yesterday thinking the House was going to pass the bailout and everything would be relatively calm. We were so wrong. Party politics reared its ugly head and instead of passing a bill that would bring some much needed financial stability to our economy, we watched our portfolio evaporate. And while we were tempted to join the sell-off, the staff at tech:stocker held tight and called everyone we knew for insight. We got nothing. So instead of joining the panic selling, we decided to hold our ground thinking that the House would eventually provide financial relief. Also, October has been one of the best months, if not the best, for market gains since 1990. Why would we want to miss the benefits of being in the October market after surviving the lows of September? Instead of investing in Banksy or Shepard Fairey prints being sold on eBay (EBAY:NASDAQ), we still think the market will eventually calm down once fears over toxic mortgages subside and will provide solid returns for smart investors.

Trying to find some value in a stock that has taken a beating recently, we decided to look at ValueClick (VCLK:NASDAQ).

Betting on online advertising in an economy that is in a recession (at least in our humble opinion we are experiencing negative growth) is definitely counterintuitive. Common thought suggests online advertising experiences the same slowdown in a sluggish economy that all other businesses experience. We're not even going to try to argue against this as PubMatic's AdPrice Index clearly shows that ad pricing is suffering from weak demand. But that doesn't stop us from looking at ValueClick as an investment.

The second quarter of this year wasn't exactly a "parade of profits" for many companies and yet ValueClick's revenue showed an increase of $15.8 million in 2Q 2008, a 10 percent increase over 2Q 2007. Considering that the economy certainly wasn't booming during that time, that's a solid increase.

Part of ValueClick's recent success can be attributed to their wise acquisition of MeziMedia. Who knew that sites like CouponMountain and MoreMedia were raking in the dollars but they are definitely helping contribute to ValueClick's bottom line as Media segment sales lag.

As the stock currently sits slightly above its 52 week low, we think ValueClick offers solid value due to its recent business strategy. ValueClick's Executive Chairman (and we do wonder why a company with a market cap of $886M needs an "Executive Chairman") Jim Zarley has done a solid job with recent acquisitions. In a market where companies will probably be begging to be bought over the next few months, Mr. Zarley could employ some of the company's extra cash to continue to improve profits like he did with MeziMedia.

Even though a company like Google (GOOG:NASDAQ) or even Yahoo! (YHOO:NASDAQ) could put some extreme pressure on ValueClick if they decided to flex their financial muscles, we believe they won't bother with this small cap in the near term and that's why we are putting a target price of $13 per share over the next 12 months. If you are feeling conservative, wait until the company announces their third quarter earnings before investing. The risk we see in the near term is if the company misses its 3Q guidance which we believe it won't.