TechTarget is a terrific, overlooked business with great growth prospects and oodles of operating leverage trading at a cheap multiple.
The basic premise of the business is a lead generation engine for IT vendors such as Cisco, HP, IBM, and many smaller firms. The company operates 150 different websites focused on the enterprise IT professional. Each website focuses on a slightly different technollogy topic, such as business intelligence software, cloud applications, cloud infrastructure, networking, etc. The content on these websites is generated by a team of 150 different editors as well as freelancers and peer to peer intercations. The company has 15 million registered users on its sites and is by far the largest player in this market.
In addition to the aforementioned content, the sites also contain IT vendor collateral such as webcasts, podcasts, white papers, etc. When a registered used clicks on a vendor's materials, TechTarget will sell that person's contact info as a lead to that IT vendor. This was the sole business model of the company from its inception in 1999 to 2013. Management was able to grow the business from nothing to $100 million in revenue with 20% EBITDA margins in 2011. However, beginning in 2011 some of TechTarget's large customers began to suffer slowing sales of their own and responded by cutting their marketing budgets, thus turning down the spigot for TTGT. TechTarget's revenue declined by 15% over two years to $85 million in 2013. Since the company is a primarily fixed cost business, this revenue decline caused a disproportionate decline in EBITDA margins to 10%.
The business began stabilizing in late 2013 and the company introduced a pivotal new product to its arsenal. The name of the product was IT Deal Alert and it basically data mined all of the user interactions on TTGT's website to determine with a high degree of accuracy which enterprise IT firms were looking to make an imminent purchase decision. For example, if 10 engineers from Morgan Stanley were researching switches on TechTarget's networking web site, it was likely that they were going to make an imminent purchase of some switches. Once the company came to that conclusion, it would actually reach out to Morgan Stanley and verify that they were looking to make a purchase, ask them how big a purchase, what vendors they were considering, etc. TTGT would then take this data and sell it on a subscription basis to their IT vendor customers.
We thought this was a revolutionary product becuase what salesman would not want to know where the hot deals were? This product grew exponetially from zero in 2013 and now represnts 20% of TechTarget's business. The company has also bifurcated the product, having one version now aimed at outside salespeople and one version aimed at inside or telesales people. We believe this will further grow the products' addressible market.
Last quarter the company announced its intention to introduce a new product in the fall. For some time TTGT has been doing post-deal surveys and gathering data on vendors' market share and pricing. The are now indexing all of this data and will sell the resulting market share and pricing data to the IT vendors themselves as well as the financial community. Speaking as a tech fund manager, the best market share data you can get from Gartner and IDC is ususlaly two quarters old as compared to this data, which will be nearly real time. What tech fund manager would not want access to that?
From a valuation perspective, TTGT is currently trading at 8.5x 2016E EBITDA. We feel this is very cheap as the company's top line is growing at 15%-20% and its EBITDA is growing 20%+. We think a 15x mutliple is more reasonable and that will get you to a $16 stock price, which is a 70% return from here. In the long run, we feel that the company can double its revenue in the next 3-4 years and also double its EBITDA margin to 40%. This would result in 4x today's EBITDA and a multi-bagger return from here.
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The company is well versed with Wall Street's beat and raise game so quarterly results are likely drivers in the near future. The company has also done two self-tenders in the past so they could announce another one of those. Finally, an acquisition by Gartner Group would be quite synergistic and other financial data companies such as Bloomberg and Reuters could be interested once the new research product rolls out.