Description
L90, Inc. is in one of the worst industries in today’s economic environment, online advertising. To quickly get to the essentials, L90 has a market cap of $25M and net cash of around $60M. Basically, the market is selling $1 in assets for about 40 cents. Of course, there is a catch to this bargain. You have to be willing to assume two things for this investment to work out well (1) we need a rational and ethical management team and/or (2) we need the advertising market and the economy to turn around within the next 18-24 months.
Here is the description:
L90 basically buys ad space from a bunch of websites that don’t want to sell their own space themselves. L90 then turns around, packages them up into targeted networks and finds marketers that want to get their online ad campaign in front of the right people at the right time. In addition to providing this basic function, L90 also helps those advertisers develop their ad campaigns by using tools other than “banner” ads, which aren’t a very effective means of driving revenue to advertisers. In fact L90 prides itself as being a “beyond the banner ad” online advertising agency. Another component of L90’s business is its technology or software product for tracking and measuring the effectiveness of an add campaign in real time, adMonitor. This software is obviously sold to existing publishers (the websites they place ads for) and marketers (the advertising client) but also sites that are “do it yourselfers”
Don’t get me wrong, LNTY is most likely not a wonderful business, but the price being placed on it today by the market makes it a compelling investment. I don’t have a ton to say about this company other than the fact that LNTY has blemishes and one of them is that they are still burning cash, about $5M per quarter ($0.20 per share). They are in the same business as Doubleclick, Engage, 24/7 and Valueclick (which has been written up in VIC) but it does have some different attributes from its competitors that makes it a bit more interesting from a fundamental standpoint.
Here are some details:
Revenues will probably be around $45M-$50M in 2001. Lower than they hoped at the beginning of the year.
It now has over 600 publishers as clients (again, publishers means websites). Their top three Web publishers accounted for approximately 20% of its revenue.
It has over 1000 advertising clients such as Proctor & Gamble, Visa, Compaq, GM, Adidas, Warner Bros. to name a few. They boast that less that 10% of their revenues are from “questionable dot coms” and they aren’t too top heavy with its biggest 5 advertisers making up about 10% of revenues in 2000. Contrast this with Doubleclick’s revenue base. They are very much focused on appealing to traditional advertisers. My view is the web is just another media outlet, nothing more, nothing less and that it is in an evolutionary stage. Traditional advertisers will eventually adopt it like radio, print and TV. This bodes well for L90, long term. But the ultimate question is, does L90 have long-term to worry about?
So what can go right, and what can go wrong.
Let’s focus on the scenario where things go wrong. The economy and advertising market stays really bad for at least 2 years and L90 is unable to grow its business much at all. After 6-8 quarters I would expect that L90 would have burned through another $30M or so. This would leave them with about $1 in cash per share. I would hope at some point before this happens, L90’s management team would fold up shop and return the excess capital to shareholders (of course without skimming too much off the top for themselves). This assumes a rational and ethical management team.
Another scenario is that the advertising market rebounds in about a year and we are left with a viable company that is close to cash flow breakeven and has about $40M-$45M in cash left. What is L90 worth in this case? I don’t have a clue, but I do know it is worth a lot more that $1 per share!
In the end, L90 is a company that is operating in one of the worst industries in its darkest hour. I don’t have the foggiest idea when things are going to get brighter. What is clear to me is that for $1 per share today, I will most likely get at least $1 back in a couple of years with a good possibility of a lot more within 2 years. Not very scientific, but does investing in situations like these need to be?
Catalyst
In the end, L90 is a company that is operating in one of the worst industries in its darkest hour. I don’t have the foggiest idea when things are going to get brighter. What is clear to me is that for $1 per share today, I will most likely get at least $1 back in a couple of years with a good possibility of a lot more within 2 years. Not very scientific, but does investing in situations like these need to be?