Ancestory.com (ACOM) surged Wednesday on a report from Bloomberg that said the firm is working with famous technology banker Frank Quattrone's Qatalyst Partners to sell itself to unlock shareholder value. We believe the company is significantly undervalued, and think the move, if confirmed, makes a lot of sense, given the market's reluctance to place an appropriate value on the firm's shares.
Ancestry.com, in our view, should get a substantial premium over its current price if it were sold either to a strategic bidder or to a private-equity consortium, given the firm's tremendous cash-flow generation and negligible debt. Our fair value estimate for the firm rests in the high $40s, and we would not be surprised to see offers in that range in coming months. Ancestry.com, by our estimates, is trading at roughly 13 times 2013 earnings, which we expect to advance significantly from the current-year level.
In our view, Google (GOOG) is one potential suitor, as the search firm is the world's top data aggregator and could improve upon Ancestry.com's search infrastructure. However, Facebook (FB) may be the most likely strategic buyer, as it has long been rumored that linking family and friends not only through social means but also through ancestral connections has both intangible (time spent on Facebook, etc) and tangible (cross-selling, advertising revenue, etc.) benefits. Perhaps needless to say, Ancestry.com has an excellent cash-rich, subscription-based business model that is bolstered by an incredible network effect that's created when millions of users add personal ancestral content. Such a cash-flow stream could easily handle a significant amount of debt, making it an attractive candidate for private equity firms at the right price (which we believe is substantially higher from today's levels). As the release of the 1940 US Federal Census continues to be digitized in a searchable format (the firm has only completed a few states thus far), we're expecting a surge in subscriber growth through the end of the year and into 2013.
In the spirit of transparency, we provide our independent opinion of the firm's valuation for the investment community and potential suitors and other interested entities to use as a second opinion in the evaluation of the intrinsic worth of Ancestry.com. Our 16-page stock report can be downloaded at the following link here.
Additional disclosure: ACOM is included in the portfolio of our Best Ideas Newsletter.