ValueClick (VCLK) – Part 3 – Business Issues

The table below represents the company’s growth over the years:




















-2000200120022003200420052006 2007(E)2008(P)
Revenue (Millions)56.744.862.592.5169.2304 545.6650750
Earnings (Millions)(55.6)(7.2)(10.5)9.887.940.662.67590
Shares Outstanding (Millions)323773.774.38490100100100
Earnings/Share(1.72)(0.2)(0.14)0.131.050.450.620.750.9




The revenue growth of ValueClick for the most part reflects the revenue of the companies acquired as opposed to organic growth. However 2006 and 2007 saw organic revenue growth as the company benefited from expanding into Europe. Also worth mention is the synergy achieved through the integration of display ad network and comparison-shopping products. Revenue and Earnings are expected to grow at around the 20% range going forward.

ValueClick is currently priced at 30 times next year’s projected earnings. With an expected earnings growth of 20% the PEG ratio comes in at well above 1, making it a rich valuation. The shares also experience volatility on constant rumors about ValueClick getting acquired.

The current two-way split-up of the Internet ad inventory between the search engines and the display ad networks will soon see an overhaul with the arrival of the social media websites. Facebook and My Space along with other social media sites pose significant threats to the company’s display ad network business. Facebook’s flyer ads base behavioral targeting on the information volunteered by users as opposed to ValueClick’s model of concluding user interest based on online behavior. My Space also uses a similar strategy. Eventually, as the social media networks mature, the ad inventory will get split among search engines, social media, and display ad networks with the latter getting more headwinds.

The fact that Social Media is only in infancy with ideas still being developed into viable business models should be a cause for concern. The competitive landscape still in the works makes it difficult to gauge the full extent of this risk. Nevertheless, the overall advertiser inventory and the long tail of the Internet should continue to grow. ValueClick’s niche in serving this segment should hold steady moving forward.

The FTC (Federal Trade Commission) investigation into ValueClick’s lead generation business is a considerable risk factor. The immediate problem of decling revenue due to advertisers shying away from lead generation may already be factored in the share price. ValueClick did experience a precipitous price drop after 2nd quarter results came in below expectations. The investigation will help determine whether the company violated the CAN-SPAM act in its lead generation business. CAN-SPAM deals with rules that prohibit businesses from sending unwanted email messages to wireless devices. It has been noted that nearly one-third of ValueClick’s revenue may be tied to aggressive marketing that violates FTC guidelines. Regulation of the industry that results in negative growth in the lead generation business is the worst-case scenario.

Given the valuation, steady growth expectations in the company’s niche display ad market, and the prospects of developing the comparison shopping sites into significant retail ad revenue drivers, ValueClick should provide average returns in the long term.


ValueClick Analysis:
  1. Part 1 - Accretive Acquisitions Driving Growth.
  2. Part 2 - Developing Synergy Among Different Businesses.
  3. Part 3 - Business Issues.

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