InfoSpace hit a split-adjusted high of $1,190/share in March of 2000. It has been a downhill slide ever since. Today the stock trades at $7.19/share. But there is a lot of value in that $7.19 share price.
InfoSpace Inc.(INSP, Financial) develops search tools and technologies that assist consumers with finding content and information on the Internet. The company provides search services through its Web sites, such as Dogpile.com, WebCrawler.com, MetaCrawler.com, and WebFetch.com, as well as through the Web sites of distribution partners. It serves primarily search content providers.
Some numbers....
InfoSpace has a $256MM market cap and a $33MM enterprise value sitting on $223MM of net cash (about $6.25/share on 35.5MM shares). It generates - on a recurring basis - about $20MM+ of FCF a year. Google and Yahoo! are InfoSpace’s largest customers and represent 90%+ of InfoSpace’s search revenues. Ironically, they are also InfoSpace’s largest competitors.
In essence, InfoSpace is a search engine of search engines – so called “metasearch” engine. You can go to one of their various search sites (Dogpile, Webcrawler, etc.) and when you type in a search it searches Google, Yahoo!, Bing, etc. It maintains that it generates better search this way – who knows. But they get paid by the big search engines for putting up their sponsor links each time there is a click through. They basically are an aggregator of additional search volume. Not a fantastic business, but it is profitable. INSP also does private label search and has recently entered the e-commerce business which burns some cash but should be breakeven this quarter and a long-term growth platform.
The Company's profits drop right to the bottom line due to an enormous $815MM NOL. The NOL is incredibly valuable to the company because it will allow INSP to buy other profitable businesses at potentially accretive prices due to the tax shield. It is also very attractive to strategic buyers that could use the NOL as a tax shield to their profitable business models (subject to 382 limitations that allow for only their partial use).
Risks:
- The Yahoo! and Google distribution agreements that layout the economic relationship with INSP come due in early 2011. How will the company do negotiating new agreements with its two largest customers? (my guess is that it will be a big yawn)
- Will management use the cash on its balance sheet in a smart way or will it overpay for an acquisition? Management's stock options are struck right around $7/share, so they don't want to do anything dumb here either. Incidentally, stock compensation is about 70-80% of management's total comp.... so they are rightly incentivized
- When will internet advertising pick up? Don't know
- Will the Company's recent foray into e-commerce via Haggle.com and Mercantila.com payoff? The CEO seems to have a background that would know this space well.
Adding it all up:
Base Case:
$6.25/share in cash
+ $0.75/share in FCF/year
+ $2-$3/share NPV of NOL
+ $1/share terminal value in 2011 (really trying to kill it here)
= $10+ share price in 1 year (+40%)
Upside: Re-hit INSP's all-time high of $1,190/share sometime in the year 2094
Downside? If it has an abysmal 2011 and doesn't generate FCF, maybe Cash(?) - $6.25/share (-13% downside). NOL could be worthless if it never makes a profit.
Potential surprise upsides:
+ Highly accretive small acquisitions that are highly tax efficient
+ Cut a good deal for themselves with Yahoo! and Google in early 2011 (or sooner)
+ Get taken out by a strategic for the NOLs (worth probably an incremental $1.50/share to an acquiror)
+ The company decides to buyback some shares
+ Internet advertising environment improves
Please shoot holes in the thesis with a gatling gun - no pride of losses.
InfoSpace Inc.(INSP, Financial) develops search tools and technologies that assist consumers with finding content and information on the Internet. The company provides search services through its Web sites, such as Dogpile.com, WebCrawler.com, MetaCrawler.com, and WebFetch.com, as well as through the Web sites of distribution partners. It serves primarily search content providers.
Some numbers....
InfoSpace has a $256MM market cap and a $33MM enterprise value sitting on $223MM of net cash (about $6.25/share on 35.5MM shares). It generates - on a recurring basis - about $20MM+ of FCF a year. Google and Yahoo! are InfoSpace’s largest customers and represent 90%+ of InfoSpace’s search revenues. Ironically, they are also InfoSpace’s largest competitors.
In essence, InfoSpace is a search engine of search engines – so called “metasearch” engine. You can go to one of their various search sites (Dogpile, Webcrawler, etc.) and when you type in a search it searches Google, Yahoo!, Bing, etc. It maintains that it generates better search this way – who knows. But they get paid by the big search engines for putting up their sponsor links each time there is a click through. They basically are an aggregator of additional search volume. Not a fantastic business, but it is profitable. INSP also does private label search and has recently entered the e-commerce business which burns some cash but should be breakeven this quarter and a long-term growth platform.
The Company's profits drop right to the bottom line due to an enormous $815MM NOL. The NOL is incredibly valuable to the company because it will allow INSP to buy other profitable businesses at potentially accretive prices due to the tax shield. It is also very attractive to strategic buyers that could use the NOL as a tax shield to their profitable business models (subject to 382 limitations that allow for only their partial use).
Risks:
- The Yahoo! and Google distribution agreements that layout the economic relationship with INSP come due in early 2011. How will the company do negotiating new agreements with its two largest customers? (my guess is that it will be a big yawn)
- Will management use the cash on its balance sheet in a smart way or will it overpay for an acquisition? Management's stock options are struck right around $7/share, so they don't want to do anything dumb here either. Incidentally, stock compensation is about 70-80% of management's total comp.... so they are rightly incentivized
- When will internet advertising pick up? Don't know
- Will the Company's recent foray into e-commerce via Haggle.com and Mercantila.com payoff? The CEO seems to have a background that would know this space well.
Adding it all up:
Base Case:
$6.25/share in cash
+ $0.75/share in FCF/year
+ $2-$3/share NPV of NOL
+ $1/share terminal value in 2011 (really trying to kill it here)
= $10+ share price in 1 year (+40%)
Upside: Re-hit INSP's all-time high of $1,190/share sometime in the year 2094
Downside? If it has an abysmal 2011 and doesn't generate FCF, maybe Cash(?) - $6.25/share (-13% downside). NOL could be worthless if it never makes a profit.
Potential surprise upsides:
+ Highly accretive small acquisitions that are highly tax efficient
+ Cut a good deal for themselves with Yahoo! and Google in early 2011 (or sooner)
+ Get taken out by a strategic for the NOLs (worth probably an incremental $1.50/share to an acquiror)
+ The company decides to buyback some shares
+ Internet advertising environment improves
Please shoot holes in the thesis with a gatling gun - no pride of losses.
