Comparing US and French Internet Media Companies

Jun. 16, 2011 7:47 PM ETGOOG, BIDU, MEET
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Tech, Semiconductors, Telecom, Internet

Contributor Since 2010

Edward Schneider is a managing director of Quan Management LLC. Mr. Schneider has over 30 years of investment experience, including 25 years managing technology funds in both quoted equities and venture capital. Mr. Schneider holds a CFA designation, an MBA from Thunderbird and a BA from Emory University. Quan has generated 17% annual return since 1995, versus 11% for the Nasdaq.

All four of our French internet media companies appear to be undervalued compared to their closest US and China peers - Google (GOOG), Baidu (BIDU), Facebook, and Quepasa (QPSA), with EV/Revenue and EV/EBITDA multiples that are exponentially higher than their French colleagues. Counterarguments include market-leader premiums for most of the US names, greater size and trading liquidity, higher margins excluding Quepasa, and a larger addressable market. Still, the US-France valuation gap looks excessive.

Internet Media Cos ($, millions) EV 2011 Revs 2011 EBITDA EV/Revs EV/EBITDA EBITDA Margin
Adverline 51.1 39.8 4.5 1.3x 11.4x 11.3%
Rentabiliweb 220.0 156.2 29.1 1.4x 7.6x 18.6%
Weborama 69.5 31.2 6.0 2.2x 11.7x 19.1%
AdThink Media 52.4 46.9 6.3 1.1x 8.3x 13.5%
French Avg
 -  -  - 1.5x 9.7x 15.6%
US/China Avg  -  -  - 13.9x 27.2x 23.3%
Google 123,173 36,581 15,276 3.4x 8.1x 41.8%
Baidu 43,809 2,010 1,174 21.8x 37.3x 58.4%
Facebook 72,573 4,050 2,000 17.9x 36.3x 49.4%
Quepasa 98.9 8.0 -4.5 12.4x  - -56.3%

The selection criteria was based on social/internet advertising companies with strong technology platforms. We chose the leaders in the US, China and France. We threw in Quepasa because we needed a small-cap to match the market caps of the French companies, it was the closest fit to Facebook, and we are short Quepasa.

We were quite generous with Quepasa's revenue estimate and related multiple, as the large majority of Quepasa revenues are generated by its major shareholders.

Facebook EV and market cap, and projections are rough estimates. Facebook's fully-diluted share count ranges from 2.27B to 2.50B depending on sources. We used the most recent transaction price of $32 x 2.27B, and excluded any net cash as it would be immaterial. Overall, we were conservative with Facebook's valuation as its expected IPO valuation is rumored to be around $100B.

Facebook's growth prospects are impressive. Revenues are estimated to increase 2.5x this year, and EBITDA should jump 4x. Growth will moderate as member growth slows, although this will be offset by rising revenue per user which is currently only $6. With 668M users and growing, Facebook will take advantage of several potential revenue streams from this massive global user base. This high-margin, extremely scalable business model will maintain a premium valuation in the market.

Much fanfare has been made of the regulatory risks faced by Google and Facebook. Google may face a US Federal Trade Commission (FTC) inquiry about rigging its online search engine in Google's favor, which may have pushed down Google' stock price recently. It will be difficult for the FTC to prove that Google is overriding natural search results, and putting its services on top, without knowing Google's algorithms used to rank sites. It would be unprecedented for the government to extract Google's proprietary algorithms, and put them in the public domain. Similarly, Facebook could face privacy restrictions, as they own the personal data of its 668M current users. Similar to the Google analysis, I see this as a red herring. Despite the growing efforts of organizations to make Facebook users aware of their loss of privacy, the number of users continue to grow, and few are leaving. While France may take an extreme stance, the rest of the world will continue to allow Facebook to operate.

For those US investors who cannot trade overseas, I would recommend Google. Valued at 14x 2011 earnings, with close to 20% long-term earnings growth, high earnings visibility, impressive margins, and a premium brand name, Google shares present an attractive risk-reward for investors. Furthermore, Google shares do not reflect the potential windfall from its Android mobile platform, that does not generate substantial revenues today, but has the potential to be a large direct or indirect revenue contributor in the future.

For those investors that can invest overseas, we would recommend France-based AdThink Media (ALADM) and Belgium-based Rentabiliweb (BIL) which are cheaper than both its Francophone and US peers. French competitors Adverline (ALADV) and Weborama (ALWEB) have higher EBITDA multiples than AdThink and Rentabiliweb. Weborama, however, has higher EBITDA margins and are very strong growth, which may partially justify its higher valuation. Adverline looks expensive versus its French peers.

I previously recommended buying AdThink Media in November 2010 at €2.97 (see my initial AdThink blog - In the past two weeks, AdThink stock gyrated from €3.85 to a €9.79 high in one day, then fell to €5.41 before settling in at €6.19 at Thursday's close. This net price boost is quite impressive considering the bear market environment. The positive market action was driven by both fundamentals and speculation.

Google's $400M bid for AdMeld, which is 13x AdMeld's 2011 revenues of roughly $30M, threw a speculative frenzy into AdThink's share price. AdThink is similar to AdMeld, but its market cap currently trades at only 1.1x our estimated 2011 revenues of €33M ($47M). AdThink may not merit a 13x revenue multiple - Audience Monetization, which is the most similar to AdMeld, should account for about €17M ($24M) of 2011 revenues, plus AdMeld addresses a larger US market. Management confirmed to us that they are not currently in strategic talks with Google. Nevertheless, the AdMeld-AdThink valuation differential appears to be too wide.

There was also a blog this month on a marked increase in AdThink's Audience Monetization activity through its Adsmarketplace exchange. This led management to announce on June 13th that they expect an 85% increase in 1H 2011 Audience Monetization revenues, with continued strong growth in the second half. This blew away the one sell-side analyst forecast that follows the stock, and fundamentally contributed to a higher stock price.

On June 13th, management also announced an expected accreditation from Facebook to manage and monetize Facebook ad space applications on AdThink's Adverstream platform. While this is potentially huge, it may be a bit premature until the deal is signed (Rentabiliweb  subsequently announced that it actually received Facebook accreditation, leading to a small boost in its stock price). Finally, management discussed an international launch of Adverstream before the end of this year, which also has potentially large implications over the medium term.

€, millions
2006 2007 2008 2009 2010 2011e 2012e
Revs 3.524 8.647 15.576 19.474 23.474 33.000 43.000
%chg +140% +145% +80% +25% +21% +42% +30%
EBITDA 0.364 0.951 0.688 0.931 2.686 4.455 6.235
mgn 10.3% 11.0% 4.4% 4.8% 11.4% 13.5% 14.5%
Net Inc 0.239 (0.280) (0.987) (1.122) 1.556 2.740 4.050
mgn 7.2% (3.2%) (6.3%) (8.0%) 6.6% 8.3% 9.4%
EPS NA (0.06) (0.20) (0.22) 0.26 0.46 0.69
%chg NA NA NA NA NA +77% +50%

At €6.19 ($8.79), AdThink has a market cap of €36.8M ($52.3M), and is trading at an EV/2011 Revenues of 1.1x, EV/2011 EBITDA multiple of 8x, and a P/E of 13x 2011 EPS (or 11x 2011 EPS excluding amortization). This is attractive in relation to its past growth (revenues +20% to +30%, and exponential profit growth - albeit off of a low base), expected 2011 growth (+42% revenues, +66% EBITDA, and +77% EPS), or longer-term revenue growth of 20+% with rising margins. Thus, not only is AdThink attractive on a relative basis versus local and international peers, but it is attractive on an absolute basis as well.

Similarly, Rentabiliweb is also a very attractive company. Revenues and EBITDA both grew just under 40% last year. Revenues should rise 22% this year to €110M ($156M) before accounting adjustments for Micropayments. EBITDA also should rise 22% this year to €20.5M ($29M). Our 2011 estimates can go higher if new product initiatives in astrology and Canada continue to take off. Similar to AdThink, Rentabiliweb is trading at an EV/2011 Revenue multiple of 1.4x, EV/2011 EBITDA multiple of 8x, and a P/E of 14x 2011 EPS excluding amortization, which appear quite cheap compared to its past and future high growth rates, solid profitability and cash flow generation.

Please note that our Quan Technology Fund is long AdThink Media, Rentabiliweb and Weborama, and is short Quepasa.

Disclosure: I am short QPSA.

Additional disclosure: I am long ALADM (France), ALWEB (France), BIL (Belgium)
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