A couple of years ago I was happily short Constant Contact in the mid-$20’s (Nasdaq: CTCT) and enjoyed some gains as investor enthusiasm immediately after the IPO wore off and the shares traded closer to my Intrinsic Value estimate (which was $14 at the time.)
The core of the short argument in the past was that CTCT had to rely on a fairly long contract period with a customer to recoup their high customer acquisition cost. The industry is also characterized by many players and low switching costs. When combined with a high valuation it was easy to identify as a good short. (Link to the old research note in PDF.)
The company has come a long way since then and has certainly grown into their early valuation excess. I’ve been neither long nor short these past two years but have spent some time taking a fresh look at the company including a visit to the company back in August. It’s interesting to note their revenue growth (and expectations for future growth) have declined considerably in the past two years.
Quite a few shares are sold short on CTCT, and the stock has moved up fairly sharply in the past few months and is now finally breaking out to a modest new high above $26. This sets the stage for a dénouement of sorts as a new strategy to additional services to existing customers is tested in the market.
More Customers or More Revenue per Customer?
I’d imagine the shorts are noting that the company has seen a few quarters where subscriber additions were lower than expected. At the same time, though, they have managed to get more revenue per customer by selling additional features (like event marketing, online surveys and social media tools) to existing subscribers.
This dynamic may make the stock price a tug of war between longs and shorts for the next few quarters. Generally speaking, our IV estimate would not be impacted by a small reduction in revenue with a corresponding increase in operating margins. However, there does come a point where if growth is slow enough the multiple might be revised down.
In the near-term, earnings growth is poised to be quite strong which isn’t going to help the shorts with a compression of the multiple if it comes through. CTCT is a well-followed stock with 14 analysts covering it and 12 of these having positive ratings on the shares. Ona GAAP basis, earnings per share are expected to go from 10c in 2010 to 34c in 2011 and 60c in 2012. Analysts and the company focus more on EBITDA and adjusted earnings per share because they are higher and this makes the shares look less expensive.
Is there a brand story here?
As a firm we don’t use Constant Contact and have never really liked it. We’ve tried several alternatives and have ended up liking MailChimp more. But it’s important to remember that there are a broad range of customer types out there.
Constant Contact makes no apologies about being targeted toward the small and technically limited business person out there. Their emphasis is on ease of use and support. It’s no secret that you can use a combination of MailChimp and Google Docs to do what Constant Contact charges $30/month for. Many people do just that. But for many, they prefer to pay a little for something that simply works and is well supported. They have a business to run, and costs for solutions like Constant Contact are generally a much better bargain than services like the Yellow Pages which can easily run from hundreds to even $1000/month.
I haven’t seen any rigorous reviews or studies yet, but Constant Contact seems to be positioned as basic email/online marketing with training wheels. There’s nothing wrong with that if it sticks and the company continues to deliver on it. There are about a dozen serious alternatives and they all have their boosters and detractors. Since email/online marketing is a general purpose tool that everyone needs, the end result may just be a growing but still fragmented market for many players.
Unfortunately there isn’t much to do at this price in my view. The IV suggests a price of $25 which is about where the shares are trading. However, if I wanted to make a bet I’d think the stock may be in a position to squeeze shorts and see some near-term upside for two reasons:
- The economy seems to be picking up and online activity keeps accelerating. This provides a backdrop against which CTCT numbers could come in better than expected due to a pickup in overall demand and willingness to spend.
- If the “online social marketing platform” meme gets established and CTCT becomes one of those “anointed” situations where the market decides a theme and a stock go together, the IV won’t matter (at least for a while.) Look at what has happened to stocks like OpenTable (OPEN) and Motricity (MOTR.)
For the traders out there, a long position in CTCT would make sense to play the breakout and the potential short squeeze. We’re too focused on our IV methodology to play it but don’t want our conservatism to spoil the fun for anyone else.
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