On March 22, email and social media marketer ExactTarget (NYSE:ET) completed its initial public offering (IPO). Since the firms' founding in 2000, it has grown sales rapidly and is very optimistic about its ability to continue expanding in an overall rapidly growing market. At the current sales multiple, it is going to need substantial growth for the newest batch of public shareholders to make money in the stock. For related reading, see Investing In IPO ETFs.
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ExactTarget offers marketing services through digital applications such as email, mobile phones and social networks including Twitter and Facebook. In the prospectus it issued related to its IPO, it boasted large public clients including Priceline.com (Nasdaq:PCLN), Scotts Miracle-Gro (NYSE:SMG), Papa John's (Nasdaq:PZZA) and Angie's List (Nasdaq:ANGI), the last of which also recently had an IPO.
In its prospectus, ExactTarget cited market data from Forrester Research, estimating that marketing spending across interactive channels, which include display, search, email, mobile and social media is growing as a percent of total advertising spending and could total a $77 billion market by 2016. This would represent 26% of the total advertising market.
The Bottom Line
ExactTarget's most appealing investment attribute is that it is growing rapidly. Over roughly its past decade of existence, revenues have jumped at a 58% annual rate. On the negative side, ExactTarget's space is extremely competitive. Rival Millennial Media is set to go public soon while Constant Contact (Nasdaq:CTCT) is already public. Mail Chimp is another rival and there are plenty of other smaller rivals offering similar services. Given the high number of competitors and relatively low barriers to entry, it's very difficult to conclude that ExactTarget has any ability to differentiate its marketing services over the long haul.
Of course, at the right price it might be worth gambling that ExactTarget's rapid growth will eventually translate into sustainable earnings and solid shareholder returns. Unfortunately, the lofty level of the valuation multiples also leaves something to be desired. ExactTarget listed 64.5 million shares outstanding after its IPO. Multiplied by the share price, this leads to an estimated market value of about $1.7 billion. Given the 2011 revenue of $207.5 million, this puts the price-to-sales ratio at 8.5. It has reported three consecutive years of earnings losses, rendering a P/E analysis ineffective. Free cash flow has also been negative over this time frame.
The argument is that the company is positioning itself for growth and will worry about profitability at some point in the future. But given the high price to sales ratios, there are already lofty profit expectations built into the valuation, which could be difficult to come to fruition given ExactTarget's uncertain competitive edge. For additional reading, check out 5 Must-Have Metrics For Value Investors.
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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.