InfoSpace Inc. (INSP) stock jumped 15% this week, closing Friday at $9.56, up from $8.28 the week prior. Given the strength in the broad market -- the S&P 500 was up 7.4% for the week -- the fact that a small-cap tech company doubled the market gains would normally not be of significant interest.
However, there are two interesting factors at play. First, volume in the relatively unknown content search provider spiked strongly (click to enlarge images):
Chart courtesy finviz.com
Indeed, here is the daily volume for the week:
3M average data courtesy Yahoo Finance; daily volume data courtesy nasdaq.com
Volume was over double the average on Monday and Wednesday, and was five times normal on Tuesday, breaking the million-share mark for the first time in over a year. Bear in mind that although the broad market had an excellent week, volume was not particularly heavy. As such, it seems unlikely that the bullish market trend was a major fact in the volume spike.
The second interesting aspect of INSP's rise is that the company currently has $7.11 in net cash. As such, the per-share enterprise value of the stock -- defined as the share price minus net cash on the balance sheet -- more than doubled this week, from $1.17 to $2.38. A business the market valued at just $46MM last Friday is now valued at nearly $100 million.
Granted, INSP has made these moves before -- the chart above shows some sharp moves within the company's trading range between $8 and $10 per share. But what might be different this week is the takeover drama surrounding Yahoo (NASDAQ:YHOO), one of InfoSpace's key partners. Google (NASDAQ:GOOG) and Yahoo accounted for 80% of the company's 2010 revenue (per the most recent 10-K). Might a Yahoo acquisition of InfoSpace be under consideration? Given INSP's large balance and substantial net operating loss carryforwards (NOL's) -- totaling $788 million as of December 31, 2010 -- an acquisition by Yahoo, or its potential acquirer(s) might have little net cost, while adding a new tool to the struggling search business.
The enthusiasm for a potential acquisition has to be tempered by a number of factors, however. First, InfoSpace itself has been actively seeking an acquisition of its own. Indeed, the company brought in Cambridge Information Group's Andy Snyder as a director in part to aid in the process of finding a suitable target. (CEO Bill Ruckelshaus discussed the strategy in the Q&A of the most recent conference call.) Secondly, the company's corporate structure, as detailed in the 10-K, should make a takeover more difficult; any unwanted overture could be easily defeated by the board through the issuance of preferred stock, the requirement for a supermajority vote in favor of the acquisition, or other means. Finally, the company's low enterprise value limits the value of the NOLs for a potential acquirer (per IRS Section 382), meaning the $788MM tax asset is more valuable should INSP be the acquirer, rather than the target.
So the question remains: what caused the price and volume spike in INSP earlier this week? Is the company simply a beneficiary of the Yahoo takeover chatter, causing unfounded rumors of its own? Or has the prospect of private equity firms (or Yahoo partner Alibaba Group) unlocking the value in one small search provider raised the value of another? Might there be something to the idea that InfoSpace will benefit from the speculation surrounding its partner?
In the meantime, INSP is running up against what has traditionally been stiff resistance just south of $10 per share. (The stock hasn't traded in the double-digits in some eighteen months.) But, fundamentally, the stock still looks solid. As noted, net cash is over $7/share, and full-year earnings will be 38 cents at the midpoint of fourth quarter guidance, excluding losses from the company's divestiture of e-commerce acquisition Mercantila. Free cash flow for the first three quarters exceeded $10 million, an impressive figure compared to the company's $95 million enterprise value. If the stock can break through resistance, or if further rumors and/or volume spikes persist, this week's bull run could continue. In the meantime, the company's cash balance and strong cash flow provide a solid downside cushion if the recent speculation proves unfounded.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.