Look how smart I am. Back in July I recommended investors pick up shares of Blucora (NASDAQ:BCOR), formerly known as Infospace, Inc. ahead of the company's earnings release on July 26th. And sure enough, Blucora blew away estimates, and the stock jumped 28 percent.
As I wrote in that piece, "a strong season for TaxACT could provide a short-term boost," and the resulting revenue growth could be a boon for the stock. And revenue did grow -- but most of the growth came from the legacy search business. TaxACT saw revenues grow just 11% on a pro forma basis, though income rose more than 21%, according to the Q2 earnings presentation.
Maybe I wasn't THAT smart. But I was right -- if for the wrong reasons. It was the legacy InfoSpace search business that led to the huge earnings beat. Search revenue grew a solid 51% year-over-year in Q2, continuing a recent acceleration. After yearly revenue gains of just over 3% in 2010 and 7% in 2011, the legacy search business has seen revenue increase by nearly 50% in the first half compared to the year-prior period.
With that type of growth, the stock may still have more to run, despite the fact that BCOR has now risen nearly 130% from lows around $8 per share in late 2011. On a pro forma basis, trailing 12-month non-GAAP earnings are $1.73 per share, putting the stock's earnings multiple below 11. Levered cash flow, according to Blucora, is $75 million over the same period, putting LCF yield over 10 percent. That strong cash flow has rebuilt Blucora's balance sheet; after funding much of the $287MM TaxACT acquisition with cash, Blucora again has a nicely positive cash position. Net cash sits near $67 million, or about $1.62 per share.
If Blucora can maintain recent growth levels -- or even something close to it -- the stock appears vastly undervalued. Third quarter guidance from the company projects revenue of $90-$93 million. With the company noting on its Q2 conference call that the seasonal TaxACT business would likely see similar revenue numbers to last year's $2.0 million, search growth in Q3 should grow 56-62% if guidance is met, beating even the torrid rates of recent quarters. Net income growth will be far more mild, as the tax segment adds a loss to Blucora's overall earnings picture, but at the midpoint of guidance trailing non-GAAP earnings would rise from $1.73 to $1.77 per share. P/E would sit at just 10.3x, and well below 10 when backing out the company's net cash. That's a low multiple for the type of growth BCOR is experiencing, growth management expects to maintain. On the call, Blucora noted the search revenue strength was coming from new partners, and felt confident that the addition of more B2B customers would "provide a catalyst for continued growth."
With a P/E barely over 10, the potential for near-50% pro forma revenue growth in 2012, and a strong balance sheet, BCOR still looks enticing even after doubling year-to-date. But there is a catch: mobile. Back in May I noted the troubling effect the move to mobile was having for Internet titans such as Google (NASDAQ:GOOG), Pandora Media (NYSE:P), and Facebook (NASDAQ:FB). Google has seen cost-per-click drop significantly due to increased mobile usage; given that Google represents some 70% of Blucora search revenue, according to the most recent Blucora 10-Q, those decreases will likely affect Blucora going forward. Even CEO Bill Ruckelshaus admitted on the Q2 conference call that "revenue models, as they evolve from desktop to mobile, will lag." Ruckelshaus expressed confidence that the industry would adapt, pointing out that search providers are still "in the early days" of the mobile move, but there will likely be some short-term struggles.
Those fears haven't stopped Google from gaining some 30 percent over the last two months; but Blucora is not Google. Furthermore, Google was range-bound for about two and a half years before its recent run-up. Blucora, as noted, has seen a tremendous bull run this year, perhaps raising investor expectations heading into Q3 earnings next month.
With the threat of mobile looming, and a drag on earnings in Q3 and Q4 from the newly acquired TaxACT business, it looks like investors might be best off taking some profits in Blucora. The company deserves tremendous credit for re-starting growth in search and executing what has so far been a successful acquisition of the online tax preparation business. If it can overcome the continuing transition to mobile and keep its growth rate steady, the stock is undervalued. But that will be a tall order indeed.