RetailMeNot (SALE) stock has been a disaster for investors that bought around IPO levels, disappointing like many other stories that worked great in VC hands and failed as public companies. Indeed, the reasons for the poor performance are also not that different from many others, i.e. slowing revenue growth rate and lack of consistent profitability combined with high investor expectations. The company, as a predominantly coupon site with heavy reliance on desktop and search traffic, suffered from changes in search algorithms by Google (NASDAQ:GOOG) and declining traffic from the desktop, just as the broader retail sector came under pressure and the management underwent changes.
Even now, exposure to the desktop is still high, almost 65% of the core segment revenue, reliance on Google remains high, with approximately 59% of the traffic coming from organic search, and one can argue that potential to monetize the mobile traffic is still bigger than what is being done right now. But over the past year or so, there has been an active effort to make strategic changes that promise a profitable, diversified and sustained growth, enough to drive a better trading multiple for the stock down the road.
The fundamentals have started to reflect the company's move away from just another coupon site towards a broader savings platform encompassing gift cards, retail brands, restaurants, etc. Even though the investments are underway, the audience engagement metrics that may serve as a leading indicator for any online business are encouraging and the profitability of the consolidated business is strong enough to allow the company to easily carry-on with the changes.
Now that the sentiment towards the space is improving/turning around, as reflected by the results and the subsequent market reaction towards GroupOn (NASDAQ:GRPN) and Quotient Tech. (NYSE:QUOT), and investors, including private, turning their focus towards profitable growth rather than just growth, RetailMeNot may benefit as one of the cheapest and faster-growing names in the space. Besides improving fundamentals, the space should command increasing investor interest, with seasonality providing a tailwind, as a good back-to-school play.
At a stable pedestal and catalysts taking shape
The latest, beat and raise, results do point to an improving visibility and a life beyond desktop for the business. No doubt, the story for desktop, with revenues declining 11% and constituting 65% of the core segment revenue, is finding stability and the improving conversion due to the site updates seem to suggest that there is hope. In the meantime, both in-store & ads business, up 37% in the most recent quarter and 21% of the total net revenues, and mobile, up 18%, continue to act as growth drivers. One of the major opportunities can be monetizing approximately 19 million of mobile unique visitors more effectively.
The development of the gift card business seems to be gaining momentum after the acquisition of GiftCardZen, a secondary gift card marketplace, in April. Besides expanding the TAM for the company, strategically, the business can offer diversification from the company's reliance on the retailers in general and add another touch point with the consumer that is looking to save. So far, the business is predominantly sourcing gift cards from the wholesale channel, but increased investment should improve sourcing from the retail channel, giving a further push to the business. Please read my recent Blackhawk (NASDAQ:HAWK) note on the ramifications of digitalization of the gift cards space.
Some of the other planned enhancements that sound promising enough are the launch of food & dining as an official category on the platform and refinement of geo-targeting capability. With net cash of close to $188 million on the books and expected adjusted EBITDA of almost $55-60 million for the current year, the company should not be feeling short of cash to invest in any opportunity thrown by a tight private funding market.
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