|Shares Out. (in M):||44||P/E||0.0x||0.0x|
|Market Cap (in $M):||200||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||-46||EBIT||0||0|
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Idea: Long (QNST) – Quinstreet
Valuation Range: $5-10 (11%-120% upside)
Quinstreet is a leader in online performance marketing and operates a number of lead-generation websites catering to the education, financial (auto insurance, credit, health, life), and business to business markets. They are paid to deliver a qualified lead to their client which converts to a sale resulting in an attractive ROI for QNST’s client. QNST’s generates traffic through organic search, and search engine marketing.
(For additional info: Scott737 did a writeup on QNST on Sept 12, 2011. http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/57072)
We might be jumping the gun a bit as we are calling the turn before it is fully reflected in the financials, but what we’re seeing with the announcements, insider transactions, and expected improvement, as well as the basement valuation, gives us some gumption to get this out in front of the community. As we detail some of the facts below, what impresses us is the rapid growth they are seeing with several new initiatives (albeit much off a low base). This is the first time in 4 years where it sounds like they have the right product set and the right positioning and at the same time their core markets (insurance/education) seem to be starting to stabilize. The CEO buying some stock in the open market (even though he owns 12% of the company already) could be a decent signal that at least he truly beleives the corner is close to being turned.
Recent Results/Data Points
Cash Flow Characteristics
A Not-So-Good Case
A Worst Case
If growth doesn’t come, and management keeps pouring money down the hole…then you could imagine that FCF falls to 3-5% margins (or worse). At 3% FCF margin, doing similar calculation as above: $100mm market cap = $2.50 stock price (40% downside). I imagine then the management team would pay up, do an LBO and then re-optimize for cash flow.
A Best Case Scenario
Sample list of Quinstreet Domains
Quotes from Recent Earnings Calls:
“Now, before I turn the call over to Greg to discuss the financials in more detail, I want to recap where we are in auto insurance. This is exciting stuff, at least to us. We've talked for the past couple of years about the range of challenges we've been addressing in that important market and about the progress we've been making. Most of that progress has been incremental and largely defensive given the narrow footprint of insurance product, the need to rebuild and update the complex policy product from acquired assets and the competitive environment.
By contrast, the launch of the three new products this past quarter represents a dramatic – represents dramatic progress and a step function increase in our addressable market. The products put us in position to turn back to offense. We're excited to be at the point where we can now confidently spend aggressively on marketing and media to grow those products and that business. I believe this was a major turning point for us in auto insurance and as a company. Revenue growth is key to increasing shareholder value and to returning to margins and cash flows more in line with historic levels.”
“We are making more progress faster on more important initiatives than at any time in company history. That progress is not yet driving top line growth because of the large scale and persistence of the market challenges we are facing and working to offset, and due to the naturally earlier stage and smaller scale of the growth initiatives, but our efforts have significantly dampened the effects of the challenges”
“Now, finally, as of this quarter, our full range of complementary
new products in Auto Insurance will all be launched including recoded, more flexible and usable policy flows, new competitive lead products, expanded call and call center capabilities and an important new version of our historically
core, click product. We have client commitments for all of these products and I have personally visited many of our biggest Auto Insurance clients over the past month to confirm their enthusiasm, strong interest and demand. With these pieces in place, we're now able to push forward efforts to ramp our Auto Insurance business, add scale in earnest. I do not expect to see much of an inflection and impact on the top line from those efforts in the current quarter, but I do expect to begin to see it in fiscal Q4 and beyond and what we expect to be an accelerating pace”
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