Intelligent Speculator

Just before discussing Valueclick, I want to do a quick comment. Last week, we had suggested going long Baidu (BIDU) against a short on Yahoo (YHOO) and while like all pics on this blog, it is a long term play, the investment returned 27,52% in 1 week* and so I would cut half of my position to take the profit, it’s a major move for a one week investment and so locking in part of it makes sense in my opinion.

*Since this trade involves no cash, we calculate return with the locked up amount on such a trade (70% of the short position).

Now back to the main subject here:

Talk about a stock getting hammered right? And for good reason. Valueclick, one of the dominant companies in the online advertising world from 4-5 years ago looks like it is slowly being swallowed by Google and others and lost a lot of its innovative power. Valueclick had most of its growth thanks to many acquisitions that have been key as they purchased assets such as Commission Junction, Fastclick in the past few years.

That gave the company an opportunity to profit in many ways. Of course, they were now able to offer advertisers access to different technologies, a much more diverse content and to do cross-selling for advertisers that would wish to combine branding, lead generation, etc. But Valueclick Inc. has been very disapointing as they have not been generating much innocation in their products which has reflected in their numbers as revenue has been flat to down in the past 2 years, something that is just not acceptable in a field that has been growing so fast. Sure, the latest quarter has seen slower growth across the industry, but in an industry that is growing at about 20%, it raises a lot of questions to see Valueclick being unable to join the growth story.

One positive in Valueclick is that they have no long term debt (have not had in their history I believe) and they are still buying back their stock believing it is cheap. It might be since it is trading at an 8 PE ratio and if it could present a more detailed idea of its future, that could make it a very attractive price at this valuation.

Another reason to own Valueclick would be based on the possibility of it being acquired. This has been in the rumors for a long time now and frankly I’m surprised it has not happened yet, but the major decline of the stock might make this possibility a lot easier for a cash rich company like Microsoft who is looking to increase its presence in the online advertising world to compete with Google.

So I would own this stock but would hope for either an acquisition rumor or a detailed plan. This would be based a low valuation and very limited downside because of its strong balance sheet.