This week I started digging deeper into Bankrate (NYSE:RATE). Bankrate, if you are unfamiliar, is marketing company specialized in personal finance products. The company owns a number of the leading personal finance websites including Bankrate.com and CreditCards.com. The company helps consumers learn about personal finance products and compare leading offers. Bankrate is paid on a CPA basis by financial services companies including American Express, Capital One, etc.
Bankrate stock is down by about 42% in 2016. In February, shares of the company plummeted on disappointing earnings, analyst downgrades, and a shadow was cast above the company's organic customer acquisition channel.
In short, Bankrate is dependent on acquiring customers through organic content. Content marketing and organic traffic is a blessing and a curse. Organic search traffic delivers consistent and high margin revenues. Over the last 20 years, Bankrate has established itself as an authority in personal finance. In turn, Bankrate is awarded with high search rankings and an annuity like revenue model. High search rankings are extremely valuable to a company like Bankrate who is in a high value industry. Customer acquisition costs in the personal finance space is very high. Customer acquisition costs in the credit card space is ultra high.
While organic search engine marketing is a lucrative strategy, there are many uncertainties. Bankrate has effectively built its primary customer acquisition channel on the back of Google's search engine. In 2015, approximately 80% of Bankrate's credit card consumer inquires came directly from organic searches.
And, when Google (NASDAQ:GOOG) (NASDAQ:GOOGL) changes the playing field Bankrate is forced into a tough position. In 2015, Google launched Google Compare, a comparison shopping site for auto insurance, credit cards, and mortgages. Google effectively created its own version of Bankrate for consumers. Bankrate experienced a significant decline in organic search traffic which led to a very disappointing quarter. Since then, Google has shut down Google Compare.
The company was slammed by analysts for being too dependent on organic search traffic. While Google Compare is no longer an immediate threat, Google may decide to bring back Google Compare in the future. Bankrate needs to diversify its customer acquisition strategy away from organic search.
In May, Bankrate acquired NextAdvisor for:
The upfront consideration is $76.3 million in cash and approximately $3.0 million in time-based vesting-restricted stock units, representing approximately 5 times pro forma trailing 12-month adjusted EBITDA. The earn-out consideration includes a potential payment of up to $137.9 million payable in cash or Bankrate stock and up to $7.8 million in cash for time-based vesting-restricted stock units, based on the NextAdvisor business achieving certain growth goals over the 18-month period following the closing of the transaction.
To be clear, the earn-out is in addition to the upfront payment.
The NextAdvisor acquisition received little coverage. Here at Seeking Alpha, the acquisition received no coverage or analysis from contributors.
That said, the NextAdvisor acquisition is a step in the right direction. Management is clearly looking to invest in its non-organic, or paid, marketing channel.
If you aren't familiar, NextAdvisor provides consumers with in-depth research and unbiased reviews of credit cards and other personal financial services and their content is syndicated broadly across the web. Like CreditCards.com, NextAdvisor is paid on a CPA basis.
If you like personal finance content, you've likely seen more than a few NextAdvisor ads.
NextAdvisor, unlike Bankrate, is focused on acquiring customers through paid online marketing. The Bankrate acquisition of NextAdvisor will help the entire company loosen its dependence on organic search. As of the first quarter conference call, Steven Barnhard, CFO, announced that the company's credit card segment now generates only 70% of its revenue from organic searches, down from 80% a year before. Bankrate management is thinking in the right direction. Bankrate is working to grow the company's paid ads customer acquisition channel.
NextAdvisor will remain a separate business unit under the CreditCards.com umbrella. However, management made it clear that the NextAdvisor team will be leading a paid content marketing push for CreditCards.com.
The NextAdvisor guys are good at what they do. We couldn't get exact margins from management on the conference call following the acquisition, but Barnhard told us that the margins were "I mean the margins on the business are very healthy."
Bankrate should help the NextAdvisor business too. Bankrate has pricing power in the credit card industry. NextAdvisor should benefit from the scale and pricing power held by CreditCards.com.
Would I buy Bankrate stock today? I'm not sure. I am still in research mode.
I will be looking for updates on the NextAdvisor acquisition, and management's push away from its dependence on organic search traffic. Organic search isn't a bad thing, it is a great thing. Bankrate should in no way forget about organic search.
Bankrate might be a diamond in the rough. The company hold very valuable online assets, and has built itself quite the annuity. I firmly believe that if management can lower its dependence on organic search traffic shareholders will see valuation expansion and growth.
I am currently eyeing the $7.50 puts at March 2017 expiration. As of today, you could collect about $0.95 by selling to open these contracts. Shares of Bankrate would need to fall by over 13% for you be in the red. I don't see too much downside in Bankrate. At this point, I believe the dependency risk is already priced into the stock.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in RATE over 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.