Bazaarvoice (BV) is aggregating online information around product reviews and commentary. Customer acquisition and revenue growth have been very strong. Surprisingly the company is managing to lose substantial amounts of money despite nearly $150K in average annual revenue per customer. We can only push our IV to $7, which makes the success of the deal and subsequent move up to over $16 in the aftermarket a surprise.
POSITIVES, NEUTRALS AND NEGATIVES
+ Company is serving a large potential market, which is currently a "hot button" for most marketing and sales organizations. Growing sales from existing customers has validated the value proposition.
+ Bazaarvoice has a number of different offerings that provide customer intelligence as well as aggregation and interaction tools that companies can use to build their own social presence online.
- + Revenues are recurring which provides the company a good deal of visibility in the model.
+ Gross margins are attractive at 60% with room to move higher.
= The management team is solid but not inspiring. Their background is mostly web analytics, which is essentially what this is with a more social flavor.
= Company is integrated with many popular social networking platforms but these are not really "partnerships" as described by the management team.
- Bazaarvoice has a business model that won't generate much operating income in the next several years. Even with a substantial expansion in gross margin and aggressive reductions in operating expenses as a % of sales the company doesn't reach profitability until 2015 and generates meaningful profits for the first time in 2016.
- There are not many barriers to entry in this business. There are scores of online marketing and customer analytics firms that are well funded or public already. All of these are incorporating social networking data to enhance customer intelligence. The other products are similarly common.
- It's really the combination of lack of profits and low barriers to entry that makes Bazaarvoice problematic for public market investors at this point. Add to that a high initial valuation and the shares begin to look attractive as a short.
We used 40% growth and a steep ramp in operating margins, combined with a 25x multiple to push the intrinsic valuation (IV) to $7. We'll see how banking analysts deal with the pricing issue when they initiate coverage in a month. New IPO names are hard to short but this one would be high on our list.