Bankrate: Expecting Short-Term Upside of More Than 20%

Bankrate, Inc. (RATE) announced its third quarter results on November 1 (see conference call transcript). Though the stock tanked on the opening tick of the day post results announcement, it soon witnessed an awakening of approximately 13% to close with a gain of 4% on a closing basis. Though the intra-day volatility has continued in the stock on the succeeding trading day too, the stock closed with a gain of 2% making it one of the few stocks that remain unaffected by the general weakness in the broad market despite major exposure to the financial sector.

Bankrate, which runs consumer finance websites that offer advices on topics ranging from college finance to taxes such as Bankrate.com, Interest.com, Fastfind.com, etc., has come out with good results. For Q3, the company surpassed the analyst expectations of 35c by 4c. The strong revenue growth rate of 28% YOY to $24.9M was driven by a substantial growth of 37% YOY in the online publishing revenue (which offset a 13% YOY revenue decrease in print business).

The fact that the stock witnessed excessive immediate volatility post results can be attributed to the high short interest ratio in the stock (Short Interest Ratio was 15.42 as on October 15) and the weak revenue guidance. The weak financial market is a chink in the armor. While the direct exposure to sub-prime lending segment is limited to less than 1% of clicks, the company's mortgage business accounts for 42% of its revenues. However, the company occupies a strong mindshare. With a survey of 4,800 financial institutions to provide rates, and providing free rate information on more than 300 financial products, BankRate is one of the most trafficked financial website on the net. Its unique audience number of 3.97M is higher than that of Bloomberg, The Street, Motley Fool, Google Finance and Morningstar.

This will also ensure that the company can continue with its dominant position while dictating pricing despite the fact that it has already increased its prices 8 times since October '05. In July-Aug, Bankrate implemented an increase in its hyperlink rates (15% increase for mortgage, home equity and other debt-related products, 25% increase for CDs, 20% increase for money market accounts). Though there have been worries about the sustenance of the company's pricing ability, the company reported an impressive 8% YOY growth in the number of advertisers which reached 876. The page views also went up 14% YOY to reach 144.2M, driven largely by gains in organic traffic.

The pricing power and the fact that RATE derives a whopping gross margin of 88% in the online ad business indicates that good times are on the cards for the company. Overall gross margin too have come impressive at 76%, compared to 69% in Q3 '06, because of a continuing mix shift towards the high margin online business coupled with OpEx discipline. The company is also launching the full Bankrate rate tables on Yahoo Finance later this month. With these, an upside of more than 20% from current price levels is a strong possibility for the short-term.

Disclosure: none