Since my initial analysis of J2 Global Communications (JCOM), the stock has performed quite well – up over 30%. People are asking me if they should sell their shares. Since my last post, I have purchased and sold calls as well as sold about 10% of my holdings. I sold mainly to diversify. JCOM is still my largest holding (over 30% of my portfolio!) and I still believe their business and stock have a ton of potential, but I do have some short term concerns. I will start with my concerns and then move to long term potential.
Short Term Concerns:
Revenue growth is slowing – that is well known. It is hard to keep 50%+ revenue growth up (unless you are Google). What would be a true concern if growth stops (or god forbid declines) in the US market – this could indicate market saturation or a slowdown driven by a housing market downturn. Overall, I expect that any slowdown could be addressed with product and marketing shifts (different product tiers to convert more free subs, more aggressively licensing and partnerships). However, a slow growth quarter could severely hurt the stock in the near term.
Q3’s performance was within guidance. JCOM hit the top end of their guidance range (48-49 cents), but did not exceed it as it usually does. For many high-growth companies, this is fine, but JCOM has historically given conservative guidance. For JCOM to only "hit" the top end of the range, it may indicate that growth was not as robust as they had hoped. To be fair, JCOM was coming off of strong growth in Q2. Nonetheless, it is worth watching earnings growth rates.
Q4’s guidance is wide and the low end implies low growth. Q3’s earnings (excluding a one time gain) was $0.49 and guidance for Q4 is $0.50 to $0.54. I could say, “Hey, $0.54 would be great!