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LoopNet Shares Jump 7%, But Don’t Get Too Excited

February 10, 2011 | About:
LoopNet (LOOP) shares jumped 7% today after their earnings release on February 9. While management believes the commercial real estate market has stabilized and is slightly improving, I’m still wary about the stock in general. The share price rise can be attributed to their earnings and, I believe, somewhat to all the chatter over the last few days about tech stock valuations. There was a lot of speculation today about Twitter’s valuation, there was a discussion about cashing out some Facebook employee shares, which would provide a new Facebook valuation, and Google’s (GOOG) Executive Chairman Eric Schmidt came out and said takeover valuations are very high, and we may be in a tech bubble.

LoopNet certainly could be a takeover candidate because of their pristine balance sheet. Unlike those other tech companies, though, there’s not a whole lot to get excited about. They don’t have the growth prospects and, in reality, they’re not really a tech company. Unless commercial real estate dramatically improves, the company’s metrics continue to trend downward.

For those not familiar, LoopNet is an online portal for commercial real estate listings located at LoopNet.com. They list properties for sale, somewhat like a commercial version of the residential MLS system, and they list properties for lease. The difficult commercial real estate environment has been tough for LoopNet and although listings are up, the number of subscribers has been trending downward for years. They make most of their revenue from subscriptions. They also generate revenue from advertising and their online marketplace that lists businesses for sale, see bizbuysell.com. There are some other smaller initiatives out there as well, but they don’t add much to the top line.

Q4 EPS came in at $0.17, but some non-recurring items skewed the results. The main item was a $0.13 gain on the reversal of an income tax valuation allowance. Back the three items out and you only get a $0.05 gain. For the full year, EPS was $0.36 and revenue was $78 million compared to $0.27 and $76.5 million in 2009.

LoopNet’s balance sheet is stellar. They’ve got about $3 per share in cash and no debt. They purchased 8.7% of shares outstanding since Feb. 2010 and are authorized to buy another roughly 4 million shares at these prices.

However, if you back out the balance sheet cash and the special items in Q4, you currently have a very rich multiple of 37. A high multiple would be okay if the market is definitely turning, but I don’t believe the revenue announcements indicate that quite yet. In fact, management wasn’t optimistic just one quarter ago, so I’d like to see more evidence.

If LoopNet traded at half the share price it currently does, I still wouldn’t be excited about it. Let me tell you why. I don’t think they have much of a moat. Their main competitor, CoStar (CSGP) has many of the same subscribers, and they are most certainly a threat to LoopNet. Their subscriber churn also suggests they don’t have much of a moat. They’re down to 68,000 subscribers at the end of Q4. Net margins have shrunk every year since 2006, dropping from 32% to 14%.

On the positive side, they recently made a deal with C.B. Ellis (CBG), a commercial real estate company, for access to database. That should drive subscriptions over the long term, but it’s difficult to quantify right now. Their main website, LoopNet.com, also saw a record number of listing profile views in Q4 of 2010 up 44% from year-ago levels. This may be the beginning of a trend but, again, I’m not comfortable saying that at this point. Until we see more evidence that LoopNet can increase revenue and expand subscribers, this is a name that I’m staying away from. I think any potential acquirer would feel the same way.

Disclosure: Long GOOG

About the author:

Steven Kiel
Steven Kiel is the president and chief investment officer for Arquitos Capital Management, a Virginia-based investment management firm. He is a graduate of George Mason School of Law and a captain in the Army Reserves. He manages two spoke funds, The Freedom Fund, a value-oriented portfolio, and The Hayek Fund, a portfolio dedicated to free market principles. He can be contacted at steven.kiel@arquitos.com or through the firm's website at www.arquitos.com.

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