Ancestry.com (ACOM) announced today that NBC has decided not to renew its television series Who Do You Think You Are? for a fourth season. Though this wasn't totally unexpected as we had sensed some nervousness by management about the potential for a renewal during its fourth-quarter earnings call (and its blanket "no comment" response on its first-quarter call), we are viewing such a disappointment as far from tragic. The biggest initial impact from the loss of the show will be in the first quarter of next year, but due to general seasonal strength in the business during that time of year, the headwind may still be a bit muted. We are reiterating our $47 per share fair value estimate on the online genealogy provider.
The loss of the "free advertising" through Who Do You Think You Are? is a clear negative for the company's long-term subscriber-growth trajectory, but our thesis on the firm remains intact. Ancestry.com continues to benefit from a strong network effect (as more subscribers upload their family information, its database becomes better and arguably impossible-to-replicate), and the release of the 1940 US Federal Census will continue to bring new subscribers to the website through the course of 2012 and into 2013. In other words, we view the firm's business model as similar to other data service providers, like Morningstar (MORN) or Factset (FDS), which provide publicly-available information (in their case, financial information) in an easily-digestable format.
However, we'd go further to say that, because subscribers' uploaded ancestral information is a key component of Ancestry.com's product offering, the firm should garner a multiple higher than its financial-services peers. Plus, management's move to purchase Archives.com this year will only strengthen its competitive position over the long haul, ridding itself of a lower-priced competitor while introducing new subscribers to its more robust offering. Needless to say, other database firms garner much higher multiples than Ancestry.com--Morningstar is trading at about 23 times next year's earnings while Factset is trading at a similar multiple. Ancestry.com is currently trading at roughly 11 times next year's earnings, levels that we think may even be conservative given the company's aggressive share buyback program, the release of its DNA initiatives, the folding in of Archives.com, and the sustained positive impact of the 1940 US Federal Census.
In other words, the market's price on its shares doesn't make any sense to us, and we can only point to the near 40% short interest as the primary reason for the mispricing. The shorts have beaten this stock down to levels that, in our opinion, have made the risk-reward almost entirely in the bulls favor. At some point, the shorts have to cover, and with Ancestry.com actively buying stock on the open market, we continue to wait patiently for the market to more accurately reflect the firm's cash-rich, subscription-based, network-effect-driven business model that is growing earnings at a 20%+ clip.
Additional disclosure: ACOM is included in the portfolio of our Best Ideas Newsletter.