A Contrarian "Buy" Rating on Audible (ADBL)

Oct.11.05 | About: Audible, Inc. (ADBL)

Audible's stock - ticker ADBL - has been crushed over the last year. In our most recent ranking of Internet stocks' performance year to date, Audible came in second to last. That's why Citigroup analyst Mark Mahaney's initiation of coverage on the company with a "Buy" rating will intrigue contrarian investors. Excerpts from his October 7th report:

ADBL: We Can Hear This Now

We are initiating coverage of ADBL with a 1S (Buy, Speculative) rating and a $17 price target. With the stock off 55% YTD and 47% of the float held short, sentiment here is overwhelmingly negative. And for good reason. Management surprised the market in early 2005 by outlining three major new investment projects and pushing off for a year material signs of leverage in its model. Perceived competitive threats from Amazon.com have added to the share pressure.

We detail specific investment positives and risks below, but our long view is based on the belief that the secular growth opportunity for Audible has not weakened over the past year. It has in fact strengthed. Particularly with the continued very strong growth in personal digital devices, like the Apple iPod. Further, the company’s new growth initiatives – in the UK, the education segment, and with wireless applications – should help sustain very strong growth rates over the next 2-3 years. And we believe that as the company exits investment mode in 2005 and enters leverage mode in 2006, there are margin expansion opportunities in its P&L (esp. operations, R&D, and G&A).

So we put ourselves ahead 12 months, and we believe at that point the market will look back on Audible’s fundamental track record and see continued robust revenue growth and material margin expansion. And we believe the shares will likely have appreciated materially on that development.

Near-term, we believe H2:05 is likely to be the trough in terms of ADBL’s fundamentals. Specifically, we expect the company to report an over $700K operating loss, its largest in at least a year and a half, due to its new growth investments. In December ‘05, we expect another operating loss quarter, in line with the company’s guidance. We don’t expect postive operating margins until the March ’06 quarter. So can an investor make $ buying ADBL right here – at $11 and in-front of these trough quarters? We believe the answer is yes with a 12-month outlook, although we would conservatively leg into the shares over the next few months.


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