Nice to see some of the froth blowing off.Â Fundamentals still look solid so it’s a good opportunity for shifting positions around.
One new short idea we see that hasn’t gone down with the market is Constant Contact (CTCT).Â It’s held up very well at $24 post their IPO and we are looking forward to the new supply coming once the lock-up comes off.Â (The date is 11/11 and the shares coming off are 15M+)
A few numbers will help. The company just reported and guided 2007 to $50M and 3M EBITDA (they lose money) and 2008 to $82M and 4M EBITDA.Â (These numbers are mid to upper range.Â See the press release for details.)Â The customer account expanded to about 145,000.
With a current market cap of $665M we are puzzled.Â If we were buying this company we would put a price of about $60-120M on it and feel pretty fair.Â This is email after all.Â A bit of a pain but not a revolution.Â There are almost no barriers to entry and CTCT focuses on the SMB market where a switch can happen overnight without pain.
Doing some math it’s clear that the stock is well over 100x EBITDA and trades at $4,500 per customer.Â I’d expect it would be cheaper to go get them again at $1000/per.
The company appears to serve a purpose, is well meaning, has good products, nice growth, good backers and we think email has a future.Â However at these prices the stock doesn’t make sense.Â If we were an LP in this one we’d be going right to the “sell all at market” box on the decision form.
Since the company doesn’t make money it’s hard to say where we might cover.Â At some point investors will not be willing to sell shares but that level would probably be in the teens as a starting point.Â If you use the math above the shares are worth $3-4/share.Â They won’t likely get there but $24 is far above value.
Disclosure: Research 2.0 is short CTCT.
— Kris Tuttle