Spark Networks: No Love for LOV

Spark Networks (AMEX: LOV) owns a variety of dating websites catered to specific groups, including JDate.com, BlackSingles.com and ChristianMingle.com.

At first glance, the stock has all the makings of a potential value play. It's got captive audiences in a growing industry, a P/E under 10, and its net income has grown consistently as follows:

Looks great! Unfortunately, this is exactly why investors cannot make purchase decisions "at first glance". We've discussed examples here of what kinds of things get buried in the notes to the financial statements. In this case, however, the investor need not go further than the income statement. Take a look at the following line items from the 2007 and 2006 Income Statements:

While most companies lose 35-40% of their income to tax, Spark Networks actually gets to double its income in 2007, and pay very little tax in 2006! Clearly, this is not sustainable. A careful reading of the notes reveals this tax gain is a result of making up for past operating losses, and that a large chunk of these tax assets have now been used up.

Applying a normal tax rate to the 2007 before-tax income would suggest a trailing P/E of around 30, rather than the appetizing 9 currently displayed by your favourite stock screen. Does this mean Spark Networks is overvalued? Not necessarily, but as value investors we like to buy companies that consistently make money and sell at discounts to their intrinsic values, and LOV hasn't proven it measures up to either of these criteria.

Comments

[lukematt:]

For an article dated August 10, 2008, I'm very surprised that the author made no reference to Spark Networks' (symbol: LOV) recently released 2008 Q2 financial results. Although the thesis of his article would not have changed--No Love for LOV--he could have used more timely and diverse examples such as the following:

"Average paying subscribers in the second quarter of 2008 were 190,455, a 13% decrease compared to 219,196 for the second quarter of 2007."

Another problem with LOV--the company makes almost no effort to diversify its business model. With "dating" as its starting point, the company could branch off into so many different possibilities. For example, Spark Networks could acquire The Parent Company (symbol: KIDS), another Internet business. KIDS' current executives don't have a clue about the correct way to manage their company.

2008 Aug 10 07:53 AM

[Saj Karsan:]

Hi Jbowyer,

Thanks for the extra colour on LOV. The article wasn't meant to be necessarily a current analysis, but rather to help educate our blog readers on the perils of investing on the basis of superficial first glances at companies, far too often the case among individual investors.

2008 Aug 10 11:55 AM

[Dave Evans:]

Good point jbowyer, I've been blogging about the subscriber drop at LOV for years. American Singles has been losing tens of thousands of paying members every quarter for years. Decent article, happy to provide additional insight. Here's a tip, check out Frumster.com, which is for sale. Recent numbers, decent service, I'm just mentioning it because it came across my desk and looks like a decent deal.

LOV has been looking to sell for years, it will happen someday, just not sure when. Penthouse/Friendfinder was the deal of the year, that made sense. LOV is a fantastic brand but they have a lot of extra junk in the trunk that needs to be pruned.

2008 Aug 10 06:10 PM