Does looking into the past have a future?
Investors inAncestry.com (
) seem to think so, as they've pushed shares of the online
genealogy research firm up almost 50% since early June. A strong
earnings report, along with rumors of a potential leveraged
buyout, have fueled the online time-machine.
Published reports have claimed that Ancestry.com is a
leveraged buyout target with several private equity firms looming
as potential buyers. An Ancestry.com spokesman declined to
confirm or deny the rumors, saying only that the company does not
comment on speculation.
Clay Brethour is a portfolio co-manager of the Buffalo Growth
and Buffalo Discovery mutual funds. He holds shares of
Ancestry.com in both portfolios. Brethour was asked why
Ancestry.com would be an appealing LBO target.
"It's a very profitable business model. They have very good
operating margins and free cash flow. They have a tremendous
runway for further growth," he said.
In the second quarter reported in late July, Ancestry.com's
revenue of $119 million rose 18% from a year ago. At $42.9
million, adjusted EBITDA exceeded both analyst expectations and
company guidance. The key to the strong performance was the
continued growth in the subscriber base. During the quarter,
Ancestry.com added 135,000 paying subscribers, representing a 20%
year-over-year growth rate. Ancestry.com now has just over 2
Revised pricing also helped the company reduce subscription
"churn" to a nine-quarter low of 3.4%. Ancestry.com has been able
to convert some of its one-month subscribers into more lucrative
Subscription growth is the key fundamental in evaluating
Ancestry.com's prospects. It is important because nobody really
knows how many people will pay to research their family
"The addressable market has been an issue. It has been
difficult to quantify," noted Anil Gupta, an analyst with
Gupta does expect some slowing in subscription growth. Despite
the 20% expansion in the second quarter, Gupta sees just 18%
subscriber growth for all of 2012. Next year, he expects growth
to slow all the way down to 11%.
Still, Gupta thinks Ancestry.com shares, trading near 31, can
go higher. "I certainly think the stock is worth more than what
it's worth now," he said. He lends credence to the LBO rumors,
saying some of the whispers "are consistent with what we're
Brethour is not just a portfolio manager who owns the stock.
He is also an online user of the genealogy service. He believes
that Ancestry.com will benefit from a "network effect." As more
and more users join, the value of the user network grows
One example is the company's recent offer to evaluate
subscriber DNA samples. Customers pay $99 to have their saliva
samples analyzed. Ancestry.com then looks for genetic links
between that user and others in its database. "By comparing a
customer's DNA with all the other samples in our database, we are
able to identify distant cousins, most accurately fourth cousins
or better, but also some cousin matches that are far more
distant," CEO Tim Sullivan told analysts in July.
But right now, Ancestry.com's ability to match is limited.
That's because it's restricting access to the DNA offer to its
most active users. But as Ancestry's DNA database grows, its
ability to locate all those unknown fourth cousins -- and hence
its value to users -- will balloon.
At present, Sullivan said, "demand for this service is
materially exceeding our current ability to fulfill supply."
One issue is cost. Ancestry.com is currently subsidizing some
of the cost of the DNA test, explains Gupta. So for now, it's
limiting access to the new service "to our best and most loyal
subscribers." These would be the users who have built the most
extensive family trees. Presumably, they would be the richest
source for cousin matches.
An avid family-tree plotter, Brethour says he has researched
his family back to the 1600s. He stands ready to send in his
saliva for the DNA service. Interestingly, he has not yet
qualified for the program, only making it to the waiting
Network Of Cousins
This suggests the network for tracking down cousins is still
in its infancy and will hugely benefit once Ancestry.com extends
its service to meet demand.
One major factor in Ancestry.com's success to date has been
its sponsorship of the NBC TV show "Who Do you Think You
In tracking the family histories of celebrities, Ancestry.com
has been able to broadcast the appeal of genealogy and build its
subscriber base. But the show has been canceled by NBC.
Ancestry.com executives have indicated they have other TV
opportunities. Most likely, observers believe, is a cable deal.
But that will attract a smaller audience than NBC.
So Ancestry.com will have to rely more on building its own
archival offerings to enrich the family tree-building experience.
One new feature allows users to look up personal records from the
1940 census. Google has begun indexing those personal records. So
Google searches for 1940 census participants will help drive
traffic to the Ancestry.com site.
Ancestry.com shares have pushed higher with the LBO rumors.
Gupta allows that the shares have been "trading on headlines
recently." But he thinks they still have some upside. "At this
point, the risk-reward still makes sense," he said.