Yet Another Concern About Constant Contact

We’ve been writing about our concerns surrounding the viability of the Constant Contact (CTCT) business from a profit generation and valuation standpoint for some time.

Our most recent entry on February 21, 2008 outlines the key points and provides a link to our full report.

Since that time yet another material concern has emerged on our radar screen. Our report highlights competition but now we see that many site and content management solutions are being extended to include built in email marketing functionality.

Investors should also be reminded as to just how easy it is to move from CTCT to something else. The model starts to break down rapidly if clients don’t stay on the system as long as expected and CTCT management currently expects that to be a long time.

The stock has traded down in what is a tough market with a lock-up that came off last week. It’s down from $24 to $17 but is still above our estimate of $10-12 fair value.

We have nothing against the solution or the company but are only trying to find the truth with respect to fundamentals, expectations and valuation.

Comments

[contact user:]

As a constant contact user, it is a great tool. It is intuitive and affordable. While there is no true "switching cost" to moving onto a different platform, there is a simple premise of "if ain't broke, don't fix it." For a small business, i think this holds true. However, for companies that actually have infrastructure and a greater level of investment in IT/MIS, then your rationale holds true. It will be interesting to see whether this company can scale. Personally, I think they are better off adding online promotional/marketing merchandise services such as VistaPrint, CafePress. Otherwise, I don't see this company ever reaching $75 million in revenue anytime soon.

2008 Mar 24 11:02 AM

[Kris Tuttle:]

I think you're absolutely right about not moving unless there's a real reason. The competition and incorporation of basic features in other software is something that will attenuate customer growth over time.

The stock is down and closer to our mid-teens estimate of fair value. The company does need to figure out a good plan of expansion to develop a better position in the market. Other marketing products that you mention could be interesting.

2008 Mar 28 06:43 AM