February 04, 2013 - 3:44pm EST by
2013 2014
Price: 5.00 EPS $0.23 $0.31
Shares Out. (in M): 39 P/E 21.0x 16.0x
Market Cap (in $M): 197 P/FCF 0.0x 0.0x
Net Debt (in $M): 0 EBIT 19 25
TEV ($): 125 TEV/EBIT 6.5x 4.9x

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Stock price = $5.00 Market cap = $200m Net cash = $73m EV = $125m 2014E Revenue = $121m 2014E EBIT = $28m

TechTarget is a unique online advertising business that is currently very undervalued due to its cyclical component near the bottom of a business cycle and the lack of recognition by the market of its two-pronged growth strategy.  The company operates a network of one hundred websites focused on the entrprise IT buyer, which generate about eleven million visits per month.  Each website addresses its own IT topic and CIOs visit these websites to get information when they are looking to make IT purchases.  The content on the websites comes from three different kinds of sources.  First, the vendors of these kinds of products post white papers on the sites to inform the buyers how their products would help address the IT problems that they have.  Second, TechTarget has its own editorial staff that writes informative articles for these websites.  Finally, TechTarget provides third party content to its readers to help round out the information they can find on the sites.  TechTarget's network is very unique and would take a potential competitor a lot of time and money to duplicate.  Now that I've described where the sites get their content, how does the company make its money?  Traditionally the company has sourced its revenue from advertising on its sites by the vendors who are hoping to sell technology to the enterprise IT buyers.  The company has been able to sell banner ads at very high prices due to the captive audience of IT buyers with lots of money that they are looking to spend.  The company has just launched a new product that will be subscription based and perhaps take away some of the traditional cyclicality of the business.

TTGT is undeniably a cheap stock.  EV / EBIT is only 5.9x on 2013 numbers.  So why is the company so inexpensive?  I think people are looking at recent business trends and extrapolating into the future.  TechTarget's business is driven by the marketing budgets of its customers, which have been under pressure due to the weakness in the worldwide economy.  TTGT's revenue declined 5.5% from 2011 to 2012.  I would posit that this glass is half full - you are getting a quality asset at a cheap price based on the bottom of the business cycle.  The company has plenty of operating leverage with its 72% gross margins and fairly fixed operating costs when revenues do rebound.  The second thing that investors are missing is the two growth drivers that are currently occuring in TTGT's business.  The first has been going on for a couple of years and that is an international expansion by the company.  80% of the company's business is domestic and has been impacted by the aforementioned econmic weakness.  The other 20% has been growing at a 50% clip as TTGT has expanded into geographies where they were not in previously.  International penetration is still very low so the company expects to grow internationally at a 30%+ pace for the next several years.  Finally, the company has been introducing new products over the past couple of years that have served to raise the price of advertising to the customers that have used them.  TTGT has just launched a new product that allows the inside sales teams at its customers to see which firms have lots of activity on TTGT's websites indicating that they are probably looking at a technology buy.  The revenue model on this new product will be subscription based so the idea is that a) it will provide a recurring stream of revenue and b) it might garner the company a higher multiple.

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.


There are a few potential catalysts that could occur with TTGT.  The most obvious would be a sale of the company.  There are numerous media players out there who could scoop up an attractive asset like TTGT without blinking an eye.  I do not think management would sell anywhere near these levels but if a big guy would come with a serious premium, they would consider it.  Second, the new subscription product that the company is selling has the potential to be huge if they get any meaningful penetration into their customer base.  This might take a while but could be a game-changer.  Finally, if there is any improvement in the overall tech sector it would translate into serious bottom line impact for TTGT with its 72% GM and mostly fixed costs. 
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