Two members of Web.com Group, Inc. (NASDAQ:WWWW)’s Board of Directors, Deborah Quazzo and Philip Facchina, reported buying shares of the stock on December 13th at prices of about $14 per share. Quazzo purchased 7,100 shares- giving her a total of nearly 40,000 shares- while Facchina’s direct holdings now sit at just over 52,000 shares after buying 10,000 shares on the same day. See a history of insider purchases at Web.com. Studies show that insider purchases are bullish signs (read more about studies on insider trading), and when insider trading filings show consensus insider buying it is particularly bullish on average. Web.com provides domain services for small businesses in the Americas and in Britain.
Deloitte recently named Web.com Group, Inc. one of the fastest growing technology companies in North America, and that’s quite apparent when looking at the company’s most recent 10-Q: revenue in the third quarter of 2012 came in at $106 million, easily more than double the $44 million in sales from a year ago. In the first nine months of the year revenue had been up 136%. However, costs have also been up and as a result Web.com reported a slightly larger operating loss last quarter than in the third quarter of 2011. With interest expenses also being high, losses per share were 45 cents (as opposed to 19 cents in the same period in the previous year). Cash flow from operations has also grown, enough so that Web.com Group, Inc. has been paying down at least some of its substantial debt.
While the company is unprofitable for 2012, the market capitalization of $700 million (with plenty of daily dollar volume for most investors) places its valuation at 8 times forward earnings estimates. The sell-side’s optimism doesn’t end there; in their eyes, earnings growth will continue over the next several years and so the five-year PEG ratio is 0.6. Columbus Circle Investors, managed by Donald Chiboucis, initiated a position of about 840,000 shares last quarter (check out more of Chiboucis’ stock picks). However, a number of market players seem very bearish on the stock as the most recent data shows that 31% of the outstanding shares are held short.
Web.com is best compared to other businesses providing software and services to businesses. These include Adobe Systems Incorporated (NASDAQ:ADBE), ValueClick Inc (NASDAQ:VCLK), Paychex, Inc. (NASDAQ:PAYX), and Oracle Corporation (NASDAQ:ORCL). These companies are all profitable: Paychex and Adobe share a trailing P/E multiple of 22, while ValueClick and Oracle trade at 17 and 16 times trailing earnings, respectively. Paychex and Adobe also are expected to see very little earnings growth over the next year, placing their forward earnings multiples in the 20-21 range, and it is true that revenue growth at each company has been low (though positive). We think that we would avoid both of these stocks.
$1.5 billion market cap marketing provider ValueClick, as we’ve mentioned, is more reasonably priced in terms of its trailing P/E. Earnings were down 38% last quarter versus a year earlier, but revenue was up strongly and analysts expect the company to recover as it trades at only 11 times consensus earnings for 2013. Oracle also has a forward P/E of 11, though in this case it is based on the company continuing growth rates of net income similar to the 11% higher numbers it reported in its most recent quarter compared to the same period in the previous year. Oracle was also one of hedge funds’ ten favorite tech stocks for the third quarter (see the full rankings). We think either of these companies, Oracle in particular, make for better buys than Adobe and Paychex.
Web.com is a tougher call- if it can hit analyst targets, it will prove very undervalued- but that stock still seems a bit speculative to us. The consensus insider purchases, of course, are also a positive sign and we certainly wouldn’t be short the company. It will simply take more time for us to recommend buying Web.com, particularly with recent trends resulting in greater net losses.
