By Kris Tuttle
Kris Tuttle submits: We released our fuller research report on Constant Contact (pdf) Wednesday to extend our client-commentary more broadly. In summary, the report highlights the risks to CTCT based on a few key facts:
1) Since the IPO, the investor sentiment for this company has been nearly off-the-charts positive. Company presentations focused on gross profits and adjusted EBITDA rather than discuss profits. The long-term targets provided by management are far in excess of what anyone in the SaaS business would expect.
2) Costs are fairly high in that the company feels it must be a leader in the market and outspend everyone on sales and marketing to gain new customers. The economics of new customers is reasonable today but impossible to predict.
3) There are a wealth of competitors. Many appear in any search using "email marketing" as the term. Pricing is competitive and switching costs are low. Having a 40+ month customer duration expectation seems far too optimistic.
4) Millions of shares are coming off lockup on March 2nd which should find a home closer to a market clearing price of $10-12/share as instructed by our long-term valuation model.
5) Company manages for adjusted EBITDA but investors will eventually care about ROIC versus the cost of capital for the company and their economic value add, which we expect to remain precarious.
More details and proof points for the summary above can be found in the full report.