Description

ValueClick is an internet asset play trading below cash and equivalents, with no debt and with an expectation of positive operating earnings by the end of the next fiscal first quarter. Join the crowd, right? There's more, but please do read the disclaimer at the bottom of this entry.

Most intriguing is a 53% ownership stake in ValueClick Japan valued at about $135M. This is largely in addition to $117M in cash and about $10M in Doubleclick (DCLK) shares, but you won't find it glaring at you on the balance sheet, since the operations are reported together. There is about $25M on the Japan side that you don't want to double count. Nevertheless, add these things up and with a $124M market cap, we're being paid a pretty penny to take the US and non-Asian business. ValueClick took in a little over $1M in cash last quarter by selling just 17 shares of ValueClick Japan, so the stake is very real - and there are over 8000 more shares where those came from. In recent years, these situations have been limited mainly to apparel retailers loaded with inventory, so net current assets was next to meaningless. Here, though, the assets are quite real, and there is no inventory to verify.

There are reasons to believe the natural price level for the business - and the shares - should be higher. Therefore I see a margin of safety in the current price even without playing the obvious arbitrage.

The business is in transition but still growing. What is the business? An internet advertising network whereby advertisers pay ValueClick, and ValueClick in turn pays the publisher, only when a web surfer clicks on the advertiser’s banner. They are pruning their customers, taking it from 82% dot coms to 72% dot coms, while maintaining their absolute numbers. Overseas contribution will be 50% by the end of next year, and revs should hit $63M. Advantageous is that ValueClick has been able to maintain its pricing and streamline operations on the cost side, resulting in gross margin growth even as the general market for internet advertising gets hit - thanks to the performance-based model, which is more attractive in times of uncertain effectiveness of internet advertising.

VCLK is acquiring competitor ClickAgents with stock. This seems like the bonehead move of the century. The stated reason is that the deal was negotiated with the stock up at $10+, and they would have had to pay more in cash. Still, sheesh, I say buy with cash, and I admit I do not buy the CFO's reasoning. Advertising.com is a private competitor with similar revenues, but with worse profitability measures relative to ValueClick, or so I understand.

Doubleclick owns 28% of ValueClick, with rights to buy up to 45% at nearly $22/share. There is a significant lock-up on these shares that takes us well past 2001.

Founding investors and insiders had margined themselves somewhat heavily on this stock, and had to sell as it fell below five. The general lock-up on shares ended in September, precipitating a fall as well. Together, these things caused a pretty serious spike down to the 3 5/8 range, from which the stock has yet to really recover. Hence, I believe it is in a rather artifactual trading range caused by massive margin calls and abandonment by the growth and momentum fiends. Clearly it will take some time for the value guys to embrace an internet play, but the ValueClick Japan factor should make it relatively easy once open minds prevail.

Already management is starting to hear less inquiries from investors about click-through rates (they're stable) and more inquiries regarding quality of accounts receivable (relatively small and high-quality, or so I'm told). I don't expect the value guys to take too long to catch on. I'll try to answer a few questions if they come up, but I must admit I won't support this idea as much as I did Huttig - my time pressures are greater now than then [ not to say that they are greater than yours ;)]

DISCLAIMER: I benefit from this stock's appreciation, and have acquired it at a price significantly below the current one. I do not have a specific exit price in mind at this point, and make no promises that I will notify people here when I sell. I therefore prescribe two grains of salt and a ton of due diligence. You never know my motives, although I will say that I am just trying to put a second idea up in accord with the requirements of VIC, and in good faith.

Catalyst

I feel value makes a great catalyst, but in this case you have artifactual trading pressures due to margin calls, tax-loss selling, and insider lock-up expiration. All of these pressures, once released, may provide catalysts for near-term price appreciation as we move into 2001. Doubleclick owns a bunch of the stock, and it would not be terribly surprising to see a takeout, although I have not investigated this aspect very thoroughly yet. The industry is consolidating, and we're talking at the most expensive a free business here. Positive net income next year will likely put the operations on the valuation map, which could take the shares to $10 with only the slightest change in perception.