PSB Monthly Issue February 2015

February 2015

INVEST IN THE NEWEST METHOD OF MOBILE INTERNET ADVERTISING

Internet advertising has become a massive industry. In 2014, companies spent about $150 billion globally on online ads. And, spending is growing at over 15% per year.

As you can imagine, Internet advertising is also huge in the US. In fact, American companies make up about a third of the spending total.

Typically when you think of Internet ads, you probably think of banner ads or paid search results. Banner ads are those ads appearing on the top and sides of pages you frequently visit. Paid search results are the names which pop up in your search engine which are sponsored.

While those are still very popular ways of advertising online, there’s a different, rapidly growing segment of Internet advertising called performance advertising.

Performance advertising means the advertiser only pays for ads when they create an action. Sometimes that may be a click, but mainly we’re talking about entering an email, making a purchase, or downloading something (like a mobile app).

Here’s the thing…

Advertisers clearly prefer performance ads because it means they’re getting something concrete for their money.

After all, who wants to pay for non-performing ads? It’s no wonder performance ads are making such a splash these days.

As a matter of fact, it’s estimated that over $20 billion of total global online advertising was spent on performance advertising last year. If you include paying for clicks, that number is closer to $100 billion.

What’s more, there aren’t many pure performance ad companies available for investment. In fact, there are probably less than a handful of public companies which have anything to do with performance ads.

That’s where Marchex (NASDAQ: MCHX) comes in.

Key Investment Data

Name: Marchex
Ticker Symbol: MCHX
Market Cap: $168 million
Recent Price: $4.08

PSB Rating System 4.7 Stars

Raging Revenue: (4.6 stars) The company has had five straight years of revenue growth. In the most recent quarter, call-driven revenues climbed 30% year-over-year.

Beautiful Books: (4.9 stars) MCHX has over $80 million in cash compared to zero in debt. The company’s current ratio is a very strong 3.8x.

Stellar Structure: (4.8 stars) The company’s insider ownership is 22%. Institutions own another 66%. Overall, it looks like plenty of smart money is in on MCHX.

Valuation Verification: (4.5 stars) Marchex is trading at just 0.91x revenues and 1.1x book value. Given the valuation, the shares could climb 115% or more.

Meaningful Milestones: (4.8 stars) By purchasing the stock when this newsletter comes out, you’ll be eligible for the company’s just-announced quarterly dividend. $0.02 per share will be paid out on February 17th as long as you own the shares by February 6th. Get your buy orders in ASAP!

THE PERFORMANCE ADVERTISING BUSINESS

MCHX is a mobile and call advertising technology business. The company offers performance-based online advertising which connects advertisers to consumers on the Web.

Marchex has three primary advertising products. Marchex Call Marketplace is a mobile advertising solution which delivers pay-for-call ads, mostly to larger advertisers. Marchex Call Analytics is a technology platform providing data and insights on ad performance. Finally, Local Leads is a platform providing advertising solutions to small business advertisers and resellers.

That may sound like a lot, but in a nutshell, what MCHX does it gets potential customers to call businesses using mobile ads. And, the businesses (advertisers) only have to pay when a customer calls, i.e. performance advertising.

Companies relying on phone calls to generate business have a huge stake riding on the success of their ad campaigns. Marchex optimizes the process by using cutting edge technology and an advertiser-friendly model.

Moreover, with so many consumers using mobile Internet, the opportunity for utilizing pay-per-call ads is becoming more and more important. As the leader in this space, MCHX already has quite a bit of traction and meaningful business relationships.

THE NUMBERS

The vast majority of MCHX’s revenues come from call-driven sources. It’s also the area the company wants to focus on. As such, that’s what I am going to focus on as well.

Call-driven revenues are expected to be just under $170 million for 2014. Adjusted EBITDA from these sources should be about $14 million. For a company with a market cap of around $168 million, that’s not bad at all.

Perhaps more importantly, Marchex has a stellar balance sheet.

The company has over $80 million in cash, and not a single penny of debt. And, current assets are a robust 3.8x current liabilities.

MCHX’s cash position has allowed them to make accretive acquisitions, initiate a share repurchase plan, and even offer a dividend. For shareholders, that’s all very positive news.

INVESTMENT RISKS

As with any small cap investment, MCHX does have a few risks.

A slowdown in the overall economy could lessen the amount consumers spend on advertising.

Additional competition in the space could make it harder for the company to grow business.

Finally, changes in demand for mobile ads could alter the strategic direction of the company and increase costs or slow growth.

POTENTIAL RETURN OF 115% OR MORE

MCHX is one of the few public companies doing what it does. The company’s been growing revenues for years, and it has a ton of cash on hand.

Yet, the shares are trading at just 0.91x sales and 1.1x book value.

By investing in the company at this price, you’re basically paying for the assets while discounting future earnings potential to zero. That’s crazy considering how successful this company has been… and should continue to be.

Based on our analysis, we see MCHX climbing to $9.00 a share or more. Buy the shares now for potential gains of 115% or more!

ACTION RECOMMENDATION

BUY Marchex (NASDAQ: MCHX) up to $4.50 per share.
Recent price is $4.08.
Use a stop-loss of $2.75 on this position.
Don’t forget your position sizing and stop-loss rules.

Portfolio Update

Here are some highlights from the past couple weeks…

• USA Technologies (USAT), Silicon Image (SIMG), and Carriage Services (CSV) all reached new highs since our last update.
• Nevsun Resources (NSU) issued a $0.04 per share dividend on December 29th effectively lowering our buy price to $3.18.
• Silicon Image (SIMG) is being purchased by Lattice Semiconductor (LSCC) for $600 million or $7.30 per share. That works out to 41% profits for us on the trade. With SIMG being absorbed by Latttice, there’s no reason left to hold the stock. Sell your shares now and collect your profits.

Category: PSB Monthly Issues