Search engine powerhouses Google (Nasdaq:GOOG) and Baidu.com (Nasdaq:BIDU) simplify the way we find answers. What is supposed to be a time saver has most likely become a time waster. Along the way, advertisers learned that the internet is an excellent venue for reaching potential customers. In 2007, internet advertising totaled $45 billion worldwide. By 2012, that number should grow to $147 billion, 20% of all advertising dollars, according to researchers at The Kelsey Group.
Most investors know the Google story and its $600 stock, but how many know the story of Internet Brands (Nasdaq:INET)? The company is a creation of Idea Labs' Bill Gross. Originally called CarsDirect.com back in 1998, it adopted the Internet Brands moniker in 2005 to reflect a rapidly diversifying internet media company that today has over 55 vertical web sites providing targeted content in three specific consumer interests: automotive, home-related, and travel and leisure. In March of 2008, the company's websites had 34 million unique monthly visitors and 458 million monthly page views. That's a lot of attention.
What Makes It Tick
The company makes money two ways; first, it monetizes its consumer sites through targeted advertising, and second, it licenses its proprietary content and technology for use by others. In 2007, total revenue was $89.9 million with the consumer sites accounting for 70.9% of the business and its licensing division the remaining 29.1%.
Last year was also a transition year. It bought 45 websites for its consumer internet division and purchased Jelsoft Enterprises for its licensing division. Jelsoft is a developer of proprietary community bulletin board software. Internet Brands biggest advantage is its ability to drive organic traffic to its web sites, raising its profit margins moving forward. Organic traffic is web traffic that comes from unpaid listings at search engines. Pacific Growth Equities feels investors aren't factoring organic traffic into the current price of the stock, which is trading below $7, and presents a good opportunity, attaching a fair value of $12 to its 'buy' recommendation.
Internet Brands began with an inauspicious start. It went public November 16, 2007 at a price of $8, well below the $10-12 management hoped for at the time. Since then, the stock has been above and below the IPO price several times, down almost double the Nasdaq. As suggested above, this treatment may not be justified.
When it announced fourth-quarter and year-end earnings at the end of February, Internet Brands also gave guidance for 2008. Company estimates included $100-110 million in revenue, $32-36 million in EBITDA earnings, and EBITDA margins between 32-34%. These would all be healthy increases from 2007. If the company hits these numbers, the price-to-sales ratio would be 2.92, about four times less than Google's and half of Yahoo (Nasdaq:YHOO). It's not an apples-to-apples comparison, but it's still a good barometer for determining if the stock is undervalued relative to the market.
Can Bill Gross Deliver?
As far back as 2000, CarsDirect.com was considering an IPO. It never happened as the internet bubble burst. Bill Gross, CEO of Idealab, the Pasadena-based technology incubator and owner of 28.6% of Internet Brands stock, definitely has a checkered past. Winning and losing with businesses like Citysearch and eToys, Gross spent $800 million in just eight months during the dotcom bubble. However, he is clearly one of the brightest and most entrepreneurial people in the tech business.
Can Gross run a public company? Fortunately, he won't have to.
Robert Brisco is the man in charge now. He has been CEO of Internet Brands since 1999 and owns of 9% of its stock. Brisco's past includes launching the Los Angeles Times website and new media endeavors. When he first joined the company, it was losing hundreds of millions of dollars. Now profitable, they've come a long way together. (To learn more, read Evaluating A Company's Management.)
As someone who worked for an online media company, I can relate to what Internet Brands is trying to do. By focusing on a few consumer interests and providing lots of community interaction as well as useful content, it provides advertisers the perfect vehicle to attract the right customers. It expects to make a little from a lot of sites. It won't be easy given the current weakness in both automotive and home-related businesses, but in the long-term this should work