ValueClick: A Greatly Undervalued Internet Play

| About: Conversant, Inc. (CNVR)

Finding value in this market has proven to be a very difficult task. For that reason, top hedge fund performers such as Seth Klarman of Baupost Group and Dan Loeb have decided to return some money to their clients by the end of this year. In a recent interview on CNBC, legendary investor Warren Buffett stated that he is having a hard time finding bargains in the market. The Oracle of Omaha has consistently outperformed the market over several decades with his brilliant value-investing approach.

As a value investor myself, I couldn't agree more with Buffett. The Internet sector is one of my favorite growth sectors to invest in, but in the universe of high-flying Internet stocks, finding companies selling at a discount is no easy task.

Enter ValueClick

ValueClick (VCLK) is an anomaly. It's the rare Internet company trading at low multiples with tremendous growth potential. We regularly use screening tools to check for undervalued companies in the Internet sector. Our search often returns no results due to our strict requirements for a reasonable margin of safety. After the recent sell-off in the market, ValueClick showed up on our radar as an interesting investment opportunity.

ValueClick is one of the world's largest integrated online marketing companies. They deliver scalable solutions for advertisers to cost-effectively acquire customers and for publishers to maximize their revenue. The company has been in business since 1998 and has been consistently profitable for most of its existence. ValueClick has an important presence in Europe, and the company is poised to benefit from the European recovery.

Shares of ValueClick traded for as low as $18.93 on Tuesday, Oct. 8, after a broad market sell-off. Internet stocks were among the biggest decliners, and ValueClick wasn't immune to this decline. Facebook (NASDAQ:FB) and Yelp (NYSE:YELP) are up over 80% this year compared to ValueClick's year-to-date gain of just over 1%. While most Internet names were due for a correction after their huge runs, ValueClick shares just got even cheaper. The company trades at just 15 times earnings and has a forward P/E of 9.8. I believe that a great buying opportunity has presented itself for investors looking to get in on an Internet company with incredible growth potential at a very attractive valuation.

Consider the following tables that compare some of Valueclick's metrics with that of other Internet darlings.

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As the two tables above indicate, ValueClick trades at a steep discount to the other Internet names. The company also has one the lowest price/book ratios and revenue multiples in the entire Internet sector.

ValueClick as an Acquisition Target

With an enterprise value of just $1.48 billion, ValueClick is a prime target for a takeover. Companies like Yahoo (NASDAQ:YHOO) and Facebook are paying billions of dollars (e.g., for Tumblr and Instagram) for companies with little revenues and no profits. The current market conditions suggest that the company has a good chance of being acquired considering its strength in terms of its products and customers, as well as its comparatively lower market value pertaining to recent financial performance of the company.

Shorts and the Bearish Case

In a recent research note, analyst Colin Sebastian of Baird Equity Research wrote that "from a competitive standpoint, the rise of Twitter is likely to pressure smaller-scale advertising technology and platform companies, such as ValueClick." This could not be further from the truth in my opinion. Affiliate marketing is at the core of ValueClick. It represents more than one third of ValueClick's revenues. Online advertising giant Google (NASDAQ:GOOG) entered this business around five years ago, and later this year it decided to shutdown its platform, which was playing catch up with Valueclick's Commission Junction. The shutdown of Google's Affiliate Network will result in a significant increase in advertisers and revenue for ValueClick as some of Google Affiliate Network advertisers migrate to the Commission Junction platform.

I believe that Twitter could actually represent a great opportunity for Valueclick to increase the reach and distribution of its affiliate network. Traditional advertising networks such as Google's AdSense require its publisher partners to operate a website, and limit them to work with specific ad formats. Commission Junction, on the other hand, is already enabling Twitter users to earn commissions by recommending and linking to products on the CJ Network.

About 14% of Valueclick's float is sold short. That number seems incredibly high considering the fact that ValueClick's business appears to be solid and growing. Compare that to the 5% short interest on the unprofitable Groupon (NASDAQ:GRPN). Short interest in ValueClick stock increased after the company missed analyst's estimates. The most recent quarterly report showed that the company is facing challenges integrating some of their recent acquisitions.

Although these are reasonable concerns for investors in the short term, I am not worried about these factors in the long term. Shorting ValueClick is an extremely dangerous endeavor. The Internet sector is in constant consolidation mode, and ValueClick could be the target of an acquisition attempt. In addition, a low valuation coupled with a decent quarterly report could trigger a short squeeze and send the stock significantly higher. I believe that the stock could double from here.


With enterprise value of only $1.48 billion, ValueClick is simply too cheap at its current valuation. Investors can buy into a fast growing Internet conglomerate, which derives a lion's share of its revenue from its defensible affiliate marketing business. The way I see it, ValueClick is a strong buy with clear catalysts and known reasons for why it trades at a steep discount.

Disclosure: I am long VCLK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.