It appears as if we've finally shaken the ghost of the dot-com
bubble. The Nasdaq
Index
has been moving up sharply during the past few years and now trades
at levels seen back in 2000, and a few recent dot-com IPOs are now
valued in the billions of dollars. Yet as I noted
in this article
, investors may be setting themselves up to repeat history,
assigning
market
values to companies that still have a lot to prove.
Simply put, any company that is worth $8 billion, $9 billion or
even $10 billion needs to be treated as a hot young growth stock
for years to come if investors are to see any further upside.
That's why I reflexively gravitate to stocks that appear to embed a
much lower level of expectation.
[block:block=16]I also like to see these stocks move out of favor,
at least temporarily, when a real sense of value can emerge. That's
why I recently put
Zipcar (
ZIP
)
in my
$100,000 Real-Money Portfolio
(which is available for free for a limited time). It's also why I
tend to hold off pursuing a recent gainer like
real estate
data service firm
Zillow.com (
Z
)
. Zillow's
shares
have risen roughly 40% in the past three months, and I'd rather
check it out on a pullback.
But a pair of other "dot-coms" is squarely in the doghouse, and
their current valuations seem to sharply discount potential strong
growth to come...
1. Ancestry.com (Nasdaq: ACOM)
Tracking a family tree has always been a lot of fun, and this
company makes it easier than ever,
offering
a set of online tools that track the branches as they spread
outward from the tree. The company has garnered great buzz from a
companion TV show called "Who Do You Think You Are?" which airs on
NBC.
After a late 2009 debut, Ancestry.com settled into a predictable
groove. The company topped estimates, issued
bullish
forecasts, and shares marched ever higher. Analysts began to speak
of 30% or 40% annual growth, and investors got pretty carried away.
Shares are now far from the peaks of last spring, in part because
management warned investors last fall that growth was starting to
cool from a torrid pace. This was partially the result of a change
in pricing schemes to emphasize longer-term subscriptions and
reduced customer churn.
Clearly, this is a company entering into the second phase of its
growth cycle. Sales rose more than 30% in 2010 and 2011, but are
likely to rise at half that pace in 2012 and 2013. Considering less
than 2% of all Americans have looked into their family histories,
it's reasonable to assume decent long-term growth as the metric
moves up to 3% or 4%.
Analysts at Dougherty & Co. say investors are now too
bearish
on the company's prospects, and predict shares could rebound back
to $35, or nine times their projected 2013
EBITDA
estimate. Goldman Sachs has an identical
price target
, noting that peers tend to trade for 12 or 13 times EBITDA. And
this is my main point: it's best to pursue more reasonably-valued
dot-com plays.
Ancestry.com, with a multiple lower than its
core earnings
growth rate, fits the bill.
2. Carbonite (Nasdaq: CARB)
Talk about cheap. If you exclude this company's cash balance, its
enterprise value
(a metric that calculates roughly what a company would be worth in
an
acquisition
) stands at just $160 million, or less than two times projected
2012 sales.
Carbonite offers cloud-based data storage for consumers and small
businesses. It's a crowded field with plenty of competition, but
the company has built a strong base of more than a million
customers that's likely to grow along with the market. Cloud
computing is a $1 billion market now and analysts expect it to grow
to $2.5 billion by 2014.
Yet investors have fretted that it's hard to gauge this company
against its
earnings
prospects. Carbonite is spending heavily on marketing to build up
its customer base, so the company is unlikely to be profitable
before 2014. Carbonite's $72 million in cash should help mitigate
any concerns of financial troubles. More important, on a
per-customer basis, Carbonite is quite profitable. The company
expenses all costs associated with attracting a new subscriber in
the early months of a contract, even as revenue is deferred over
the life of a contract. This means the company's
cash flow
should build nicely as the subscriber base matures.
Still, this busted
IPO
sells for less than half the peak levels it saw soon after its
August 2011 IPO. From a recent $9.30, Merrill Lynch says shares
should rebound to $16. This target equates to four times projected
sales, which is still below the multiples seen by other cloud-based
businesses such as
Cornerstone OnDemand (Nasdaq: CSOD)
and
Concur (Nasdaq: CNQR)
.
Risks to Consider:
Though investors no longer hold these companies to exceedingly
high expectations, they are still expected to grow at a good pace
in coming years. Any signs that growth is stalling out should
probably seen as a reason to sell the stock.
Action to Take -->
The market is full of new dot-com business models that carry high
expectations. If you want to ride the dot-com wave, then focus on
lesser-priced stocks like these two examples.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of ZIP in one or more if its "real money" portfolios.