ValueClick : quality business run by mediocre management (VCLK)

October 17, 2010

ValueClick runs the second largest ad network on the internet, second only to the Google Adsense network. In an increasingly fragmented Internet, advertisers cannot contact each publisher individually to place advertisements, and turn to ad networks which aggregate content from many publishers. These ad networks are an excellent business, because they are semi-monopolistic toll booths on the highway of Internet commerce. ValueClick has 3 major lines of business. The largest division, Affiliate Marketing, consists of the Commission Junction Marketplace business. In the CJ marketplace, advertisers place products and services they would like to sell for a fixed commission, and publishers can incorporate these affiliate links into their content. When a product is sold through the affiliate link, the publisher and ValueClick split the commission. The second division, the Media segment, consists mainly of display advertising and email marketing performed on behalf of advertisers on its network of allied publishers who place excess advertisement slots they cannot sell with ValueClick. The last major division, Owned Content, consists of websites directly owned by ValueClick. These websites are mainly shopping/coupon-based websites (pricerunner.com, couponmountain.com), although the company has recently acquired Investopedia from Forbes in February 2010. Revenue from the Owned division derives mainly from advertising on the owned sites, much of it from Google and Yahoo.

Pluses

  • While Internet commerce is longer growing dramatically, most analysts still expect a minimum growth rate of 10% per year.
  • The Internet advertising space is dominated by Google, a situation which makes many advertisers nervous. Advertisers are likely to continue to use ValueClick, if simply to avoid giving too much market power to Google.
  • ValueClick has a history of making significant share repurchases. The share count has shrunk consistently every year.
  • Recent insider purchases suggest that management is expecting a turnaround in operations.

Minuses

  • Anecdotally, Google has the highest click-through rate of the industry, due to its superior semantics technology which analyzes web content and places ads only on relevant webpages, where they are most likely to convert into click-throughs. ValueClick has no such technology, is inferior to Google in ad placement, and accordingly achieves a much lower click-through rate and a lower cost per click.
  • As stated in ValueClick’s own 10K, there are “no significant barriers” to entrance to the industry. Indeed, many startups and new business models (e.g. Chikita, Amazon Affiliates etc.) have begun to encroach on the industry.
  • ValueClick’s management has a history of sinking large amounts of cash in acquisitions at elevated multiples, and then taking large impairments.

Management strategy

In recent years, rather than improving its core business of affiliate and ad placement, management has sunk more than $300M into acquiring web content, in effect competing with its publishers. This strategy is presumably one of synergy with its ad network. If ValueClick owns the content, it no longer has to split the advertising fees with publishers. However, I consider this to be an ill-advised strategy. Firstly, ValueClick competes at a disadvantage with content publishers in this space, as it has neither the infrastructure nor the tradition of producing quality content regularly. And web content does depreciate quickly with age, so constant updating of the content is required. Secondly, while synergies are indeed achievable with its other lines of businesses, this is very modest, and not scalable. In contrast, any improvements in its ad and affiliate network technology can be leveraged across its entire business at once. Thirdly, the content business is very sensitive to policies at Google and Yahoo. In fact, ValueClick itself reports that its Owned division took a hit to revenue in 2009 due to a change in revenue policies at Yahoo. Sadly, while management continues with its suboptimal use of cash, it is protected by shareholder rights provisions, and a buyout followed by management change seems unlikely.

Earnings

Below is a table of VCLK earnings over the last 3 years. I evaluate businesses based on Buffett’s concept of “owner’s earnings” which is the cash left over for the owners of the business after deducting cash needed for operations. In practice, I add back non-cash charges in order to arrive at “owner’s earnings”. Figures are rounded to the nearest million.

2009 2008 2007
Revenue
Media 135 131 125
Affiliate 112 122 116
Owned 149 177 112
Tech 28 29 24
Total revenues 423 455 375
Segment earnings
Media 33 25 22
Affiliate 58 59 63
Owned 25 41 22
Tech 12 13 10
Total segment earnings 139 139 119
Corporate expenses -28 -31 -30
Stock comp -9 -48 -15
Amortization -20 -22 -16
Impairment 0 -269 0
Income from ops 82 -231 56
Interest income 0 2 12
Taxes -21 34 -28
Discontinued ops 7 -19 30
Net income 68 -214 71
Depreciation/amortization 33 39 36
Impairment 5 322 0
Owner’s earnings 107 147 107

Valuation

VCLK’s annual revenues have changed with every new 10K, due to its divestments and acquisitions, making it difficult to make comparisons across years. However, its core Affiliate division’s earnings are quite stable and comparable, and I estimate that the business in its entirety should generate at least $100M annually in earnings. There is also about $200M of tangible excess assets on the balance sheet. What is the appropriate valuation for an excellent business whose management has an unfortunate tendency to burn large amounts of cash in mediocre investments, while still returning significant amounts of cash to shareholders via buybacks? I will err on the conservative side, and attach a PE of 10. This means my price target for ValueClick is $1.2B, or over a share base of 81.81M, a PPS of $14.67. Given the strong bounce in advertising and the strong operating results recently reported by Google, I expect the stock will do well in the short term. I will however look to divest my position if it surges above $14.50, since there are many other well-managed and more profitable stocks.

Disclosure : I have a long position in VCLK

{ 18 comments… read them below or add one }

Learn Islam August 25, 2011 at 8:18 am

Hello there! I could have sworn I’ve been to this website before but after reading through some of the post I realized it’s new to me. Anyways, I’m definitely delighted I found it and I’ll be bookmarking and checking back frequently!

puppy carriers August 28, 2011 at 8:25 am

Do you mind if I quote a couple of your articles as long as I provide credit and sources back to your weblog? My blog is in the exact same area of interest as yours and my users would truly benefit from some of the information you present here. Please let me know if this ok with you. Thank you!

unique baby gifts April 9, 2013 at 9:13 pm

The more things change, the more they remain the same. -Alphonse Karr

waffle maker on sale April 16, 2013 at 1:45 pm

To make scrambled eggs with a waffle maker simply crack
eggs into a bowl, add milk and wisk. Lots of people were interested, but my wife was
adamant about not coming down in price. A bonus is that it can be stored upright to save
storage space.

Adolfo April 22, 2013 at 7:35 am

Great blog you have here, but I was curious if you knew of
any forums that cover the same topics discussed here?

I’d really love to be a part of group where I can get opinions from other knowledgeable people that share the same interest. If you have any recommendations, please let me know.
Cheers!

Ultimate Chipping April 26, 2013 at 7:20 pm

Does your blog have a contact page? I’m having problems locating it but, I’d like to shoot
you an e-mail. I’ve got some recommendations for your blog you might be interested in hearing. Either way, great website and I look forward to seeing it expand over time.

michaeks coupons May 11, 2013 at 7:48 am

And this is the perfect place to do it. The kids can also keep score on the chalkboard when they play other games traveling down road.
You can add some metallic touches with gold or silver acrylic paint before you clear coat the Pea Gravel chargers.

find out more May 16, 2013 at 2:52 am

I’ve been surfing online more than 2 hours today, and this is the best article I’ve come across. I’m a article fiend so I’ve actually seen a lot already.In my view, if all site owners and bloggers made as great content as youhave, the internet would bemuch more useful than ever before.

How to Prepare for .Net Interview July 4, 2013 at 10:40 am

Superb, what a weblog it is! This webpage gives helpful
data to us, keep it up.

best chainsaw July 29, 2013 at 8:38 pm

Sneakers are good as long as you are running along the ground, but
are really not meant to be used when you do this kind of work.

This achievement materialized in 1950, even though the tool was rather bulky.

In order to keep your chainsaw in good working condition, regular maintenance is necessary and this includes the regular
use of chainsaw sharpeners.

Alexandra August 1, 2013 at 8:32 am

To keep the wood piece from moving when you are using a
miter gauge, cut to shape and glue a piece of sandpaper to the face of the miter gauge.

Despite its steel roll cage base, the Dewalt DW745 table saw is known for its light weight and portability.
It consists of a sharp blade that is normally used to cut wood in which shape and size required.

Best Waffle Maker for Thin Waffles October 18, 2014 at 11:11 am

And they come in so many amazing varieties – from healthy whole grain waffles, to
fun new shapes like minis and sticks, and even cool add-ins like chocolate chips.

These berries are packed with antioxidants and beneficial
nutriments that help in getting rid of extra pounds.
” A cultural profile of the Caucasian people points up a similar attitude toward physical labor: researchers comment that these people work “like
beasts,” eat little, and spend most of their leisure time sleeping.

walk in bathtubs March 23, 2015 at 12:19 pm

I know this site provides quality dependent content
and additional data, is there any other web site which gives these stuff in quality?

pubg mobile india May 25, 2021 at 6:41 pm

You ought to take part in a contest for one of the best sites on the internet.
I most certainly will highly recommend this web site! https://www.hackerrank.com/ellison6842

Asiaone July 10, 2021 at 7:04 pm

I think everything posted made a ton of sense.

But, consider this, suppose you added a little information? I ain’t suggesting your information isn’t solid.,
however what if you added a post title that makes people want more?
I mean ValueClick : quality business run by mediocre
management (VCLK) is a little boring. You ought to glance at Yahoo’s front page and see
how they create post headlines to get viewers to click. You might add a related video or
a picture or two to grab people interested about everything’ve written.
Just my opinion, it might make your blog a little livelier.

Tegan September 28, 2021 at 12:53 pm

I got this website from my pal who told me regarding this web
page and at the moment this time I am visiting this website
and reading very informative content here.

fun888 November 23, 2021 at 6:20 am

I don’t even know the way I stopped up here, but I thought this put up was once great.
I don’t recognise who you’re however certainly you’re going
to a well-known blogger in case you are not already. Cheers!

lịch world cup 2022 July 12, 2022 at 11:42 am

Hello, yeah this article is genuinely good and I have learned lot of things from it on the topic of blogging.
thanks.

Leave a Comment

{ 2 trackbacks }

Previous post:

Next post: