CMGI: An Alternative Play On Alternative Energy (CMGI)

May. 9.06 | About: CMGI Inc. (CMGI)

Alternative energy stocks are all the rage on Wall Street these days thanks to the rising price of crude oil. Recent solar IPOs like California's SunPower (NASDAQ:SPWR) and China's Suntech Power Holdings (NYSE:STP) have seen their stocks soar up more than 50% and 70% respectively since December 2005.

As automobile manufacturers unveil plans to produce vehicles that can run on E85, a mix of 85% ethanol and just 15% gas, ethanol producing companies like Pacific Ethanol (NASDAQ:PEIX) and much larger rival Archer Daniels Midland (NYSE:ADM) have seen a big boost in their stock prices. Investors have also shown renewed interest in hydrogen fuel cell stocks like Hoku Scientific (HOKU), Ballard Power Systems (NASDAQ:BLDP) and the aptly named FuelCell Energy (NASDAQ:FCEL).

While looking for alternative energy stocks that have not already been chased to the moon, I came across a company called CMGI Inc that could be an alternative play on alternative energy. I came across CMGI while reading this article by Mark Hulbert on MarketWatch.com discussing how George Putnam, the editor of the investment newsletter Turnaround Letter, finds CMGI interesting.

CMGI is a company that offers global supply chain management solutions and marketing distribution services through its subsidiaries ModusLink and SalesLink. CMGI also holds a stake in various early-stage and mid-stage start-ups through its venture capital arm @Ventures. Notable past investments of @Ventures include GeoCities (acquired by Yahoo), eGroups (acquired by Yahoo) and Half.com (acquired by eBay). Apart from the sizable cash position of $159.70 million that CMGI holds and the $1.07 billion in revenue that CMGI brought in last year, it was not very clear why the Turnaround Letter would be excited about this company.

There were quite a few things about this company that did not appeal to me at first glance and are probably keeping most investors away. Inventory has risen consistently over the last few quarters, gross margins are very low and the company posted a loss of $6.3 million last quarter. The corporate structure is complex and visibility is reduced as CMGI operates through various subsidiaries.

I decided to dig deeper into CMGI to figure out if it was indeed a worthy investment or not. Looking at the current portfolio of companies that @Ventures has invested in brought up something interesting. Advent Solar is an @Ventures company that manufactures solar cell and modules. The technology and patents that Advent Solar holds allow it to manufacture solar cells using ultra-thin silicon wafers.

As most followers of the alternative energy sector are well aware, silicon is in very high demand these days and manufacturing processes that utilize less silicon are becoming increasingly important in the solar energy industry. Another interesting company in the @Ventures portfolio is H2Gen Innovations, a company that designs and manufactures on-site hydrogen generators. Most companies in the hydrogen fuel cell space actually derive a large part of their current revenue from hydrogen generators as the prospect of strong revenue growth from fuel cells that power automobiles is still a few years away. Hence CMGI through its stakes in Advent Solar and H2Gen could be an alternative play on alternative energy.

The most interesting part about CMGI is however its stake in an e-learning company called WebCT that was acquired by Blackboard (NASDAQ:BBBB) very recently for approximately $180 million. @Ventures owned a 13.5% stake in WebCT and hence it received approximately $21.2 million when this acquisition closed in February. Most of this $21.2 million is likely to drop straight down to the bottom line and could end up boosting results when CMGI reports the next quarterly. The exciting investments of @Ventures combined with the steady revenue stream from subsidiaries ModusLink and SalesLink have convinced me that CMGI looks like an interesting short to intermediate term investment.

Competitors:

It is hard to determine direct competitors for a company that has a stake in such a diverse set of businesses. Idealabs with its portfolio of companies could be considered a competitor of @Ventures. Internet Capital Group (ICGE) with its portfolio of diverse companies is another close competitor of CMGI.

The Good:

* CMGI carries $190.93 million in cash, short-term and long-term investments on its balance sheet when compared to just $36.53 million in long-term debt.
* The company is likely to report good results next quarter on account of Blackboard's acquisition of WebCT.
* CMGI is also expanding its footprint in China and currently has seven solution centers there.
* The venture capital arm of CMGI called @Ventures has made some interesting investments in alternative energy companies.

The Bad:

* At a price of $1.44 per share, CMGI may be considered by some as a "penny stock".
* If the price of the stock were to drop below $1 for 30 continuous days, CMGI will be issued a delisting notice by Nasdaq.
* CMGI has a complex corporate structure with a stake in various companies through its venture capital arm.

The Numbers:

  • P/S 0.62
  • P/E 45
  • Cash $159.70 Million
  • Long Term Debt $36.53 Million
  • CMGI 1-yr Chart