Internet Stocks With Better Margins

Includes: TTGT, TZOO
by: Emerging Growth

The Internet economy has created many large-cap companies in recent years. Yet these companies, including the mighty Google (NASDAQ:GOOG) and Facebook (NASDAQ:FB), started from a low base somewhere. TechTarget Inc (NASDAQ:TTGT) and Travelzoo Inc (NASDAQ:TZOO) are examples of companies with solid business models.

TechTarget Inc offers specialized online content through a network of websites, which act as a platform bringing together buyers and sellers of corporate information technology products. In simple words, the company's business revolves around online advertising campaigns, something very similar to Google's text advertising channel, but highly targeted and effective. After a downward journey in much of 2013, the stock saw a jump of 8.5 percent last month amid hopes of better financial performance. Although it has a narrow focus on information technology products, which has hindered revenue growth, the company has been able to post a consistent growth in business, except last year when revenues dropped 5 percent. However, the company's approach of targeted advertising campaigns has merits and can be applied to other industry lines. A 5 percent discount to its book value of $4.8 per share and a debt free balance sheet are other factors to that look more favorable for the stock.

Like TechTarget, Travelzoo Inc is also a targeted play on travel, entertainment, and local deals spheres. The company has been more successful in proving the stability of its business model, which has advertisers on one end of its value chain and millions and millions of end users at the other. The company publishes travel deals for subscribers and generates the majority of revenue from online advertising. In the last four years, its top line has swelled from $94 million to $151 million and profits from $5.2 million to $18.2 million. The streak continued in the latest quarter ended June 30, during in which its sales grew 5 percent to $41.3 million, although profits tumbled on account of increased investment in technology platforms.

The company, however, maintained its double-digit profit margins. At current market price of $30, the stock is valued at nearly 22 times its forward earnings. This valuation is not inexpensive, but this debt-free company has a near monopoly in its market and offers excellent growth opportunity. Travelzoo is a big name in North America and Europe but there is still market to be explored in Asia, which has the potential to take the company and the stock to altogether new levels.

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

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