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 (NYSE:ACTV) is an example of that sort of stock. It is kind of like the Salesforce (NYSE: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.
Disclosure: I am short CRM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I may also initiate a long position in ACTV over the next 72 hours