We think that Web.com’s stock has been in free fall over the past few months because:
* A botched acquisition of WebSource undermined management’s credibility
* The cancelled GoDaddy.com IPO forced speculators out of the stock
* Management’s adoption of what we view as a questionable shareholder rights plan.
However, notwithstanding the above negatives, it seems to us that the stock has declined far more than is warranted. In fact, recent M&A in the sector appears to support a much higher price for Web.com's (WWWW) shares.
We note that Website Pros (WSPI) recently acquired 1ShoppingCart.com, a well-known SMB e-commerce provider, for $12.5 million or about 2.7X sales. WSPI itself, even after a recent stock price correction, trades at an EV/Sales ratio of 2X. Web.com and WSPI have an almost identical revenue levels, but WSPI trades at nearly the double the value with WWWW still trading at just a bit over 1X EV/Sales. In other acquisition news, Aplus.Net , a SMB web hosting provider, has been purchased by New York-based Catalyst Investors for an undisclosed sum.
Overall, our basic investment thesis remains that the predictable nature of Web.com’s recurring revenue stream makes the company more valuable than the current share price implies, especially considering recent consolidation in the SMB web hosting industry. If management continues to deliver profitable growth without getting distracted by acquisition activity, we would expect the stock to fare well in the coming twelve months.
WWWW 1-yr chart: