Short Synacor: This Stock Is Still Overvalued

Sep. 5.12 | About: Synacor (SYNC)

Since our previous recommendation, Synacor (NASDAQ:SYNC) is down 45%. It provides online content and authentication services to its customers that include cable companies, telecom operators, and consumer electronics companies. Through its platform, it helps its customers deliver popular content across multiple devices. It has a market capitalization of $215 million with 27 million shares outstanding. Currently, the stock is trading near $8 on the Nasdaq. Since its IPO in February 2012, which took place at $5, the stock has appreciated considerably. In our last report on Synacor, we mentioned the company's impressive growth in revenues and earnings. However, we suggested that much of this growth has already been priced in by the market, and that it has a limited upside potential.

The company reported its second-quarter results July 25, generating revenues of almost $31 million and earnings of $1.2 million, which -- even though it was an improvement from the previous quarter -- did not result in any positive earnings surprise. As mentioned previously, the company obtains its revenues from search and display advertising. It also generates revenues from subscription-based services. Three key metrics against which the company's performance can be appraised are unique visitors, search queries and advertising impressions, which all improved as compared to the previous quarter. However, on a sequential basis they declined, with the exception of advertisement impressions.

In our previous report on the company, we mentioned the company's overdependence on a very small customer base, and we believe that this factor continues to be a major threat to the company's business going forward. For example, Charter and CenturyLink (NYSE:CTL) together provided almost 60% of Synacor's revenue stream in the year ended 2010. If we add Verizon Communications (NYSE:VZ) and Toshiba to the above mentioned names, total revenues attributable to the four companies becomes almost 75% for the six months ended 2012. Even though the company has contracts extending over a period of one to three years, in a scenario where few of these contracts are not renewed, the company can take a significant hit on its revenue stream, which could be detrimental to its profitability.

Another problem the company faces is that with more and more consumers using smartphones and tablets for their Internet needs, rather than PCs, the company's profitability can be adversely affected. Even though the company has taken steps in the right direction with its recent acquisition of Carbyn, it is still not offering customers a wide range of non-browser services.

The company's stock has attracted a lot of speculation as well, especially when a website started pumping the stock to be undervalued, and with good growth potential. Shortly after, Jonathan Lebed also declared Synacor to be his No. 1 pick of 2012.

Despite the strong results posted by the company, the stock has lost almost 35% of its value since the earnings release, which is due to the downward revision of the quarterly as well as full-year guidance. The company is now expecting third-quarter revenues to be in the range of $28 million to $28.5 million, below analyst expectations of $30.6 million. Third-quarter EBITDA guidance of $2 million to $2.5 million also fell short of EBITDA expectations of $2.9 million. Synacor is trading at 61 times its earnings, which is a significant premium to the industry's 19 times. Forward P/E of 24 times is also higher than the forward multiples of Digital River (NASDAQ:DRIV) (14 times) and Group (WWWW) (9 times). We believe the stock is overvalued with limited growth opportunities.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by Qineqt's Technology Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.