Piper upgrades SHOP: "Valuation very attractive"

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Piper Jaffray analyst Safa Rashtchy upgraded Shopping.com (ticker: SHOP) today. In a note to clients, he wrote:

Strong Usage Level Should Lead to Upside.
Our proprietary check into the usage patternof Shopping.com websites (see next page) suggests a much stronger usage level than we have been modeling, indicating potential of a solid upside. Given the strong seasonality of Q4, we had expected a declining usage level and had correspondingly modeled for a 15% decline in paid leads. Instead, the first two months have shown a surprisingly resilient usage pattern, and we believe that if this pattern continues, paid leads will more likely be 5M-10M above our current est., resulting in rev. upside of $1.5M-$3.0M and EPS upside of at least $0.01-$0.02 above our current Q1 estimates. We have also assumed a drop in prices, which may be too conservative since the company did introduce a more permanent price increase in February after the expiration of the seasonal price increase of Q4.

Search Prices Remain Strong.
Despite concerns to the contrary, there is no evidence of any decline in overall search prices beyond seasonality and what has been modeled. Similarly, prices for Shopping.com, which follow the same pattern of the search prices, remain strong in Q1.

Upgrading to Outperform.
Over the past two months, Shopping.com stockhas seen a drop of 35%, despite no negative change in the fundamentals. In fact, as noted above, we believe Q1 outlook is much stronger for Shopping.com than previously expected. At the current price, the stock trades at 16x '06 PF EPS, with an expected growth rate of 34%. We note that the comp group of search companies is trading at 23x '06 P/E. We are upgrading SHOP to an Outperform and maintaining our current price target of $24 (18x 2006E EBITDA).

The Key Value Proposition Still Intact.
While SHOP has always been subject to the risk of reliance on other sources for most of its traffic, the growth in organic traffic is very encouraging and, more importantly, the categorization of increasing number of products is a key asset that adds value to both consumers and merchants. This is a task that is harder than it appears as none of the portals or search destinations have yet mastered it.

We are upgrading SHOP to Outperform and maintaining our target price of $24 (18x 2006 EBITDA).

Quick comments:

  • Readers of The Internet Stock Blog will already have noticed that SHOP's valuation has declined dramatically. With Internet IPOs ODMO and SHOP underwater, how cheap are they now?, published on March 9th, stated that "With its current enterprise value of $332 million and back-of-the-envelope 2006 EBITDA of $41 million, SHOP would be trading at an EV to '06 EBITDA multiple of 8.2 times. That's significantly lower than its Q4 revenue growth rate of 33%, and the 2005-2006 growth rate of 25% that I've used."
  • Investors penalized SHOP after it announced lower projected 2005 EBITDA due to its expansion plans. But yesterday's news that those plans include category expansion into hotels and geographical expansion into Asia might make investors reconsider whether the investments are in fact a positive. Note that The Internet Stock Blog (and later Piper) based its valuation analysis on 2006 numbers.

SHOP chart below.

Full disclosure: at the time of writing I'm long SHOP.