I've been following Bazaarvoice (BV) for a few months now, after I found it in a screen and was intrigued by its strong market share in the ratings and review (R & R) e-commerce space. The stock has been decimated by news that a US court ruled against BV's acquisition of PowerReviews, their main competitor in the R & R space. The opinion gives a lot of interesting information about the inner workings of BV's business.
First, the company participates in a massive market, where in 2012 the top 500 online retailers had combined sales of $216.7 billion. According to the court's opinion, BV prices their services off numbers related to online sales, including total online sales, number of online transactions, and expected sales growth. However, marketing budgets are significantly smaller than that revenue number. One rule of thumb is 5%-10% of revenues, depending on the market share of the company. If those numbers are to be believed, that leaves us with a market between $11 billion and $22 billion. That's a very broad estimate -- the point is that BV has access to a very large market.
There's a huge opportunity in this space, but BV is not executing well. Even outside of this antitrust debacle, the company dumps money into sales and marketing and research and development at a heavy rate. The quarterly statements mention that BV plans to continue to spend heavily in those areas. The underlying idea is that by spending to acquire customers, coupled with their innovative technology, BV will capture long-term clients who will need their service in perpetuity. At some point in the future they will acquire all the big clients, their costs will drop, and they will raise prices -- but that's a tough date to pinpoint. What we can pinpoint is the mix of revenue, cost of revenue, sales and marketing expenses, research and development expenses, and general administrative expenses that would lead to BV finally reaching profitability.
Over the last five years, here is how BV's numbers break down:
Click to enlarge image.
Over on the far right you'll see a column titled "20% more efficient." That uses a 20% reduction in the average % of revenue for cost of revenue, sales and marketing, research and development, and general and administrative expenses. Even with a 20% reduction in those costs, BV is just about breaking even. It's a scary picture for a company that is the dominant player in an exciting market. If BV doesn't lower these percent of revenue numbers, it won't matter how much revenue the company generates going forward.
If you are long or thinking about getting long BV into the remedy phase of this court case (a press release is due out on Jan. 17, which should provide more color), take a look at selling the BV May 10 call options against your position for added protection to the downside. With the stock around $7.50, the calls are currently $0.35 bid. That would limit your upside but offer some downside protection if the remedy turns out to be negative for Bazaarvoice.