Three Israeli Baby Googles

Includes: ANSW, PERI
by: Michael Eisenberg

Looking for a way to play Google's decent results? Look at the public Israeli internet companies whose business models are driven by Google. Looking for a way to play it safe? Look at these same companies - which are trading at cash or close to cash.

Incredimail (MAIL), (ANSW) and Babylon (traded on TASE: BBYL) have significant revenue driven by Google's Adsense or toolbars. In addition, these companies are trading at pretty low multiples, and in at least one case are sitting on plenty of cash relative to market cap. These are all thinly traded stocks - so it is tough to build a position - but I think they can all be interesting.

Incredimail (MAIL) has traditionally been a provider of email clients. The company monetized this in two ways - graphic packages and paid search. The company was put on ice by Google earlier in the year due to purported abuse. I believe that the time in the penalty box is keeping the MAIL's stock down. The stock is trading at slightly above cash today, and is pretty illiquid. MAIL has a cash position of over $21 million, TTM revenue of $21 million and a market cap of approximately $25 million.

A shakeup in the management team earlier in 2008 has also seemingly weighed on the stock . Yaron Adler left the company and his cousin Ofer Adler, the company's founder, is now running the company. As far as I can tell, Ofer has decided to invest in growth of the top line at the expense of profitability and has succeeded in doing that. I believe that the investment phase is behind MAIL at this point and the company will reap profits from its 2008 investments beginning in 2009. The company's search volume is growing as they have rolled out Google search to more users when users upgrade the mail front end.

In addition, the company has launched two new products: an IM add-on and a desktop photo manager. Each of these is a profitable small niche to monetize Google search. Another Israeli company I know is running quite a profitable business with "smiley on steroids" products for MSN Messenger. (NASDAQ:ANSW) (Full Disclosure: I was on the board of when the company went public, but have been off for years) is growing incredibly fast. According to this Seeking Alpha article, it has grown 58% in the last year, which puts it in the top 20 growth sites. Its WikiAnswers site is gaining momentum.'s stock (ANSW) has appreciated over 300% in the last 7 months and ANSW is now valued at around $90MM. has been at this for a while and seems to have finally hit its stride. The company does a little above $3M in quarterly revenue, so it is now trading at roughly 7 times revenue. Based on my knowledge of salaries in Israel (where the company is headquartered) and factoring in the site's rapid growth, with a slight increase in revenue, the company probably broke even or was profitable in Q4 (not yet announced). has about $1.20 per share in cash on the balance sheet. So the price/revenue ratio is about 7 (net of cash).

Babylon (TASE BBYL)

Babylon has for years been selling its world-leading translation software - a pay for product business. That business remains and continues to grow. However, since Noam Lanir of Empire Online (online gaming) bought a controlling interest in the company, he has worked hard on conversion to sale and added a Conduit-powered toolbar (full disclosure: Benchmark is invested in Conduit) to his products. Therefore, Babylon has also begun making money from Google searches via the toolbar and the Babylon products. As far as I can tell, Lanir and the CEO he appointed are focused on generating more revenues from Babylon's business by increasing conversion and adding revenue-generating product lines.

Babylon's stock currently trades on the Tel Aviv Stock Exchange at 4 shekels ($1) per share, reflecting a Market Cap of 165MM Shekels ($40MM). Babylon did a little shy of 17MM Shekels in revenue in Q3, reflecting about 50% growth from the same quarter in 2007. Babylon had net profits of 3.6MM Shekels in Q3 (approximately $900,000) and has cash and cash equivalents of approximately 40MM Shekels. In addition, it has approximately 13 million Shekels in accounts receivable (full financials in Hebrew can be found here).

The stock price reflects an enterprise value around 120,000,000 Shekels for a company growing 50% per year and earning 3.6MM Shekels per quarter. The P/E is about 8.

In addition to the attractiveness of investing in companies at or near cash, these smallcap companies represent three different ways to play the Google ad platform.

Full disclosure: I am long MAIL and Babylon, and wish I had been long ANSW 7 months ago.