Intelligent Speculator

The current economic context is certainly giving nice opportunities in the long/short market. I’ve been looking at trading Valueclick(VCLK) and was initially going to short the stock. I’m glad I waited a little because the earnings came in over estimates resulting in a 10% increase overnight. But I still believe the fundamentals of the company are wrong and do believe it is becoming less of an acquisition target because of its growth slowdown. As I have expressed in the past, I do believe that Google(GOOG) is in a great position to gain better position in the market.

Valueclick announced earnings last week and came in with revenues of 150M, a 14% decrease from the same period last year. It had some impairment expenses that eventually resulted in a loss of 3$ per share. Excluding the impairment, earnings would have came in at 0,15-0,16$ per share. Valueclick relies heavily on advertising in a few different ways:

-Valueclick Meda: This most important part of the network has been losing ground to Google in many aspects and while it is well positioned in terms of display advertising, we believe its weak position in “contextual advertising” will continue to hurt the rates (eCPM) it can get from advertisers. As well, consolidation in the market has hurt as advertisers are spending their increasingly important online budgets in fewer areas.

-Comparison shopping websites: These have performed very well in 2008 and seem to be a portion that is growing in the business. However, these are and will be coming under pressure as it is a very attractive segment with almost no barriers to entry. In fact, this segment had growth of about 50% during 2008 (from 113 to 177), something we personally think will be very difficult to maintain.

-Lead generation: Valueclick has an important network of publishers that use them as it takes a portion of publishers earnings. In theory, this could be a great growth segment but it seems like Valueclick has not been as innovative as some competitors (mostly private companies) have been and thus they have been losing important clients such as Ebay. As of right now, we do not see any reason to believe there will be a turnaround here.

-Basically, this is a pure play on online advertising as both companies depend almost entirely on online advertising. As we had explained when doing the pick of GOOG vs IACI a few weeks ago, we believe that Google is uniquely positioned to come out a winner from the advertising slowdown because it has ample free space to add advertising, has been innovative and because of its crucial market share that makes it the first place any advertiser will start spending its dollars on.

Downside risks of this position: We see two main risks here:

1-Google has been under 300$ recently and with markets looking fragile, it could be back there in a hurry which would put short term pressure on this pick

2-Valueclick has and will remain a possible acquisition target. The risk has been going down as their numbers have not been as impressive in terms of sales but also as potential buyers such as YHOO have seen their position become too fragile to get into an acquisition mode…

Disclaimer: As of writing this, we are long VCLK but will revert to go LONG GOOG and SHORT VCLK