Major listed Internet companies are on an acquisition binge. These companies are sitting on a big hoard of cash and ready to deploy. We have compiled an analysis of companies that are possible tech merger candidates:
Travelzoo Inc. (TZOO)
Travelzoo Inc. is a global travel deals publisher. The stock traded as high as $110 during its IPO year in 2004. The recent initial public offering of internet company Linkedin Corp. (LNKD) has pushed investors to be excited again with TZOO. There is a lot of volatility in the stock, and it would turn off conservative investors. The stock traded in the $90s last April, and has fallen to $32.66 recently.
It has posted strong annual revenue growth of 17.31% and earnings per share growth of 12% for the last five years. The company has recovered its loss in 2008 and has delivered better earnings growth than its peers. The stock is currently trading at 16 times next year’s earnings, compared to historical price earnings multiple of 52 times.
TZOO would seem to be a good acquisition target for giant internet media company Expedia, Inc. (EXPE). At the current market capitalization of TZOO of $537 milion, EXPE could easily use its annual operating cash flow of $1 billion to buy the company and easily double its revenues. At around 24 million subscribers, the acquirer would only pay around than $20 per subscriber. It sounds like a good deal, but it seems that a potential acquirer will need to convince its current management. This week, the company's board announces repurchase of 500 thousand common shares, equivalent to 3% of the company.
ComScore Inc. (SCOR)
SCOR could be a good takeover candidate for Google, Inc. (GOOG) or Yahoo Inc. (YHOO). The company is a provider of digital marketing platform, which gives insights to consumer behavior, demographics, attitudes and lifestyles. This looks like a good fit for the web analytics tools of the two Internet giants. For the past 5 years, SCOR has managed to post 28% revenue growth, mostly due to acquisitions. It reported a net loss last year from acquiring Nedstat B.V. The company has not yet recovered since its peak earnings of $25 million in 2008. Analysts expect that the company will post a profit next year with earnings per share of $0.14.
At the current price, the company looks expensive at 110 times next year’s earnings. Majority of its peers are trading at 18 to 20 times next year’s earnings. In fact, Arbitron, Inc. (ARB) is trading at 18 times next year’s earnings and dividend yield of 1.80%. Potential acquirer GOOG and YHOOO trades lower at 18 and 14 times, respectively. Over the long run, analysts believe in the economic prospects of the company, although there will be bumps along the way. The recent drop may provide long-term investors a buying opportunity into the company.
Shutterfly Inc. (SFLY)
Shutterfly is company that offers a social way to publish pictures. It competes directly with American Greetings Corp. (AM), Eastman Kodak (EK) and Hewlett-Packard (HPQ)’s web-based photo sharing services. Based on figures, HPQ has better chances of buying out this company. SFLY’s market capitalization is at $1.63 billion, equivalent to only 12% of annual cash flow of HPQ. In contrast, AM has smaller capitalization and EK has negative cash flow.
Analysts expect earnings per share of 1.01 next year, implying a 46.5 times next year’s earnings. This is significantly higher than AM’s valuation at 6.5 times forward earnings and 3.10% dividend yield. The reason is that the market is willing to pay a premium for any company associated with cloud computing and social-based marketing. It will take a while, though before the company can really make significant cash flows. Last April, it acquired Tiny Prints, Inc. to boost its commercial printing business. We would likely expect the company to use the cash flow from the business to acquire more companies. However, the company will grow faster if a bigger company, like HPQ, can add financial muscle to its growing business. Given HPQ’s thrust to move past being an ordinary PC company, this could be a possibility.
Blue Nile, Inc. (NILE)
Blue Nile, Inc. is an online retailer of fine jewelry. For the year, shares of NILE are down by 39.4% for the year. This is attributed to lower earnings guidance following lower margins due to commodity price increases. Despite the sell-off, the stock is still trading at 30.72 times next year’s earnings. This is lower than the lowest historical price earnings in the last 5 years. In terms of earnings growth, earnings per share have grown by 5.81%. This is slightly lower than Tiffanny & Co. (TIF) earnings growth of 9% during the same period. TIF trades at 15 times next year’s earnings and 2% dividend yield.
In terms of potential acquirers, we list Signet Jewelers Ltd (SIG) and Tiffany (TIF), since these are listed jewelers that have higher market capitalizations than NILE. While TIF can easily buy them out with its cash flows, we do not believe it would offer a brand outside of its own. Therefore, a better match would be SIG, which has a number of mall-based brands alongside its flagship brand. SIG generates annual operating cash flow of around $250 million, half of NILE’s market capitalization. However, the market is bearish with this stock with short interest of more than 50%.
Pandora Media, Inc. (P)
Pandora is one of the recent additions to the roster of tech IPOs. It’s a personalized internet radio company with over 80 million registered users. Revenues have grown from $19 million in 2009 to $55 million in 2010, but it has yet to generate a profit. Analysts expect the company to post revenues of $250 million next year. At this rate, the stock is trading at 3.87 times revenues. This is lower than the 10 times revenues of the industry. In contrast, competitor Sirius XM Radio (SIRI) trades at 2.24 times revenues and 21 times next year’s earnings.
The company has amazing technology and strong product, although competition in online music service is heating up. With this current scenario, the company needs to post a profit to convince investors that it's a major player in this space. The growth hinges on advertising, as studies show online advertising can grow at double digits for the next 5 years. Larger player Sirius XM Radio could acquire P to secure its dominance and crush Spotify’s partnership with Facebook. SIRI has annual cash flows of more than $500 million, half of Pandora’s current market capitalization.