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Summary

  • Techtarget's new product, it deal alert, will drive significant revenue growth over the next few years.
  • International expansion will fuel additional revenue increases.
  • Highly fixed cost business means ebitda dropdown of 70%+.

TechTarget (NASDAQ:TTGT) is an online media company with terrific top line growth potential and even better EPS growth potential. The company has fallen off investors' radar screens as a revenue slowdown at its big customers has caused a 15% drop in TTGT revenue. TechTarget is poised to reverse these revenue losses with growth in its international business and new revenue from its recently introduced product, IT Deal Alert.

TechTarget operates 150 unique websites focused on the enterprise IT professional. These sites have proprietary content written by the company's 150 editors to educate IT professionals and help them when they are looking to make IT purchases. In addition to this content, each website has data sheets and white papers provided by IT vendors such as IBM, HP, Cisco, VMware, etc. The company tracks which of its (11.5 million) registered users clicks on this IT vendor content and then sells these leads to that particular IT vendor. This is the company's core business and has been very successful, growing revenue from $45 million in 2004 to $105 million in 2011 and achieving 20% EBITDA margins by 2011. This business has seen a 15% decline from 2011 to 2013 due to marketing cutbacks at its large customers as these customers suffered from slowing revenue growth and even revenue declines. Currently it seems that there has been stabilization in this market although the company sees significant revenue growth without any snapback in customer spending in the near term.

International expansion has driven 25%+ international revenue growth over the past couple of years and that is slated to continue and have a larger effect on the overall P&L as this segment grows. The international market is far less penetrated than the domestic market and is experiencing the shift from offline to online marketing that the U.S. saw 3 - 4 years ago. These trends cause TTGT's newly launched international sites to grow rapidly for the first few years of their existence. While the company has launched a number of site overseas, there are still plenty of untapped markets left for them to explore.

The most exciting part of the TechTarget story is their product launched last year, IT Deal Alert. This product is a Big Data product that crunches all of the user data that the sites collect and then is able to predict which firms are looking to make imminent IT purchase decisions. Techtarget is selling this data on a subscription basis, akin to the software-as-a-service model used by richly valued firms such as Workday (NYSE:WDAY) and salesforce.com (NYSE:CRM). The uptake by customers has been tremendous with sales going from zero in Q1 2013 to 12% of sales in Q4 of 2013. The company is predicting that this product's revenue will triple in 2014, a conservative prediction given its level in Q4 2013 and its 20% sequential growth prediction for Q1 2014.

The icing on the cake is TTGT's tremendous operating leverage. Since the cost of operating its network of websites is relatively fixed, each additional dollar of revenue contributes 90 cents to the gross margin line and close to 70 cents to EBITDA. The company believes that a doubling of revenue would also double its EBITDA margin from 20% to 40%. This would result in EPS growing 4x over 2011 levels. Given that the majority of the company's revenue at that point would be subscription, the company could garner a SaaS multiple of some 25x earnings.

So just doing the math, TTGT earned $0.32 in 2011. If the company succeeds in doubling revenue in three years and quadrupling EPS, EPS at that point would be $1.28. Putting a 25x multiple on that gets you to a $32 stock price, a 4-bagger from current levels.

Management happens to be very good at the company. The CEO, Greg Strakosch has done two self tenders in the past four years. These have had the effect of being accretive and reducing the VC overhang. There are two remaining VC shareholders who need to be out of the stock over the next year or so. The company may do another tender and / or may do a secondary offering of these VC shares.

Source: TechTarget - Extreme Operating Leverage Plus Significant Revenue Growth Will Lead To EPS Bonanza