The Highly Profitable Web Company That Soros Loves

| About: Inc. (ACOM)
This article is now exclusive for PRO subscribers.

Want to invest in a web company with no debt, high profit margins, and a paid subscriber business model? Ya, Soros does too. The man who broke the Bank of England is investing in (NASDAQ:ACOM). Unlike today's big online companies, like Facebook (NASDAQ:FB), Ancestry charges users on a subscription basis to login to its services. This is a web company's dream business model. The paid subscription model builds a consistent stream of income and the users pay for the value instead of clicking on distracting ads. The subscription model also keeps users on the website using the product rather than moving to some other site. They aren't doing badly on the bottom line as a result.

Soros loves the massive increases in the subscriber base of Ancestry which is translating into revenue and profit growth on an annual basis. The subscriber base is up to 2 million, up 20% from the 2nd quarter in 2011. Subscriptions turnover appears to be dropping on a monthly basis from 4.6% in Q2 of 2011 to about 3.4% in Q2 of 2012. Revenue is up 19% year over year and with a good profit margin of 16%, a great growth in net income as well. The net income year over year has grown 51%. The latest quarter was a profit of $19 million for this billion dollar company.

The company has a great income statement but on top of this it has a kicker…buyout rumors. In the summer, the company put itself up for sale and shopped around for a big tech buyer or private equity firm. The company could be attractive to buyers due to the large subscriber base, low PE (for a tech company), and no debt. Rumors are that tech powerhouses Google (NASDAQ: GOOG) and Facebook may be interested. It is hard to see how a $1 billion dollar company with $70 million in net income would benefit the bottom line of Google unless Google believes they can drastically expand the company. On the other hand, Facebook would boost its $700 million in net income by about 10% with this acquisition. They could also sell the service to their 1 billion users. But who knows, these are just rumors. It does provide a nice bonus for the investor though.

Massive growth opportunities seem limited if ACOM isn't combined with some other service. If Ancestry isn't able to integrate with a social network or find an acceptable suitor, revenue will likely continue growing but not at crazy rates. Revenue growth has been about 19% in the last 12 months which is great. This doesn't make headlines for the tech industry though. Ancestry is working on extending the average length of the subscriptions to lock in customers which would be great; however, the gains will not be huge. To really step up the sales to the next level, the company needs to integrate or partner with a social network. Finding a 4th cousin in Berlin over Facebook would be fun. It would build more connections and benefit Ancestry. So looking forward, the subscriber base will likely continue to grow at a healthy rate but has the possibility for a huge jump if Ancestry can integrate with a social network.

Due to buyout rumors, the stock has increased from the low 20s to the mid 30s since June. Soros has made 26% on his investment. And, if any of the rumors are true, the stock could spike even more. Either way holding a company with a growing subscriber base doesn't hurt…seems like Soros agrees.

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.