Any SA followers that have regularly read my columns know that I am big fan of busted IPOs. Buying fast growing firms after the IPO hype has died and the stock price has fallen substantially, has been a profitable strategy for me over the years. The key is to find firms that have the potential to live up to their previous hype now selling at a discounted level. Active Network (ACTV) is an example of that sort of stock. It is kind of like the Salesforce (CRM) of cloud based applications for managing events, registrations and tasks. It has an installed base of some 80,000 organizations and is growing rapidly. Unlike Salesforce, the company has done a great job in growing operating cash flow and is selling at a very reasonable price to sales (1.68) as well.
"The Active Network provides organization-based cloud computing applications services to business customers in North America, Europe, and internationally. The company offers ActiveWorks, an organization-based cloud computing platform, which transforms the way organizers record, track, manage, and share information regarding activities and events." (Business description from Yahoo Finance)
7 reasons ACTV is a solid speculative play at $11 a share:
- The company is rapidly moving to profitability. Active Network lost 41 cents a share in FY2011 but is on track to break even in FY2012. Analysts project the company will be 32 cents a share in the black in FY2013.
- The company is already cash flow positive (and has been since FY2009). ACTV had over $65mm in OCF in FY2011, roughly a 250% increase over FY2009. The stock trades at around 10 times FY2011's OCF.
- The stock is significantly under analysts' price target. The seven analysts that cover the stock have a median price target on ACTV of $19 a share, some 70% above the current stock price. Price targets range from $17 to $20 a share. The stock traded north of $19 a share days after its IPO in May of 2011.
- The company has a solid balance sheet with some $95mm in net cash on the balance sheet (approximately 15% of market capitalization).
- The reason a growth investor should be interested is revenue growth. The company grew sales at a CAGR of better than 25% from FY2009 to FY2011. Analysts project another year of over 25% growth in FY2012.
- As the company's installed base growth, recurring revenue increases. Active Network has an over 95% retention rate on existing customers. This type of consistent subscription growth should allow the company to reduce earnings volatility and be awarded with a higher multiple from the market.
- This increased revenue base should also allow the company to improve its gross margins from 55% to 57% currently to its goal of 61% to 63% as Marketing, R&D and G&A expenses decrease as a percent of revenues.
Additional disclosure: I may also initiate a long position in ACTV over the next 72 hours