Omniture, WebSideStory: Why the Extreme Valuation Difference?

Google (GOOG) launched its latest version of Google Analytics Tuesday, so it's time to revisit the web analytics space, a category seeing tremendous growth as web sites get more sophisticated. Google's Analytics evangelist, Avinash Kaushik, breaks down the different offerings in "Web Analytics Tools Comparison: A Recommendation":

The Leaders: Omniture, HBX (WebSideStory), WebTrends, CoreMetrics

The Alternatives: ClickTracks, IndexTools, Unica NetInsight

The Free: Google Analytics, Microsoft Gatineau

Kaushik also suggests that Visual Sciences, a WebSide Story company, is in a class by itself.

From an investment standpoint, there are two public analytics companies - Omniture (OMTR) and WebSideStory (WSSI). OMTR trades for 50x '07 EV/EBITDA and WSSI trades for 11x. OMTR is growing 3-year EBITDA CAGR of 50% rate and WSSI is growing at 30%. Both companies are expanding margins and are cash flow positive. M&A rumors swirl in this sector. On the negative side, both companies face an increased threat from Google and Microsoft's free offerings.

Why the extreme valuation difference? WSSI has undergone a management and sales force overhaul (the new CEO joined in November). It is also in the process of integrating HBX and Visual Sciences; it has a weak balance sheet (approx. $5m in cash and $15m in debt), and it is has an expensive lawsuit with Neilsen NetRatings. OMTR has benefitted from WSSI's structural changes and gained market share. In addition, OMTR has a reputation for more seamless integration than WSSI.

This said, I think WSSI's stock price overly discounts the company's many challenges. Its products are well-regarded (see above) and the company should be able to work out its sales and integration issues (the lawsuit is a wild card). I think WSSI should trade closer to 15x EBITDA ($15), versus the current price of $11. I think we'll see the impact of the re-organization in the second half of this year.

Meanwhile, OMTR looks interesting as a short in a pair trade. However, I generally prefer to avoid shorting companies on valuation, especially when the underlying fundamentals are solid and the short interest is through the roof (good luck getting borrowed stock).

Comments

[Frank Li]

Surely the key issue here is: How can OMTR and WSSI maintain their valuations as Google analytics gets better and better?

Google is clearly committed to this space, because better e-commerce conversion rates mean higher bids for key words on Google searches.

I wouldn't want to bet against Google in an area that is core to its business. Makes your short case for OMTR one of fundamental positioning, not just valuation.

Full disclosure: no position in GOOG, OMTR or WSSI.