Value Find: IncrediMail, Ltd.
You don’t have to wait for the initial public offering of Classmates.com or Facebook to get in on the booming growth in Web 2.0 and social networking-related interactive media companies.
Little-followed IncrediMail Ltd. (Nasdaq: MAIL) quietly came public in early 2006 in a small IPO. Since then, the microcap play has continued to fly below Wall Street’s radar, all the while posting impressive growth and continued profitability.
Founded during the first dot com boom, $75 million market capitalization IncrediMail survived the tech crash and has emerged as a leading provider of Internet consumer products and services. The Israel-based company is named after its flagship multimedia entertainment-geared email program. This consumer-oriented email program is compatible with leading email services such as Hotmail, Gmail and Yahoo, and is best known for its vast selection of fun emoticons, email backgrounds, sounds and animations.
IncrediMail has been profitable as a company since 2002 and expects to have 11 million active users by the end of the year. IncrediMail’s revenue model is a blend of one-time fees and subscriptions (for premium versions of its products) and, increasingly, advertising. In addition to its flagship IncrediMail product, the company’s other major product is Magentic, a free program which offers an extensive selection of wallpapers and screensavers. In early August, IncrediMail introduced a closed beta version of a new instant messaging product that will integrate with existing instant messaging applications like Windows Live Messenger. In a bid to further leverage its user base, IncrediMail also plans to introduce a new Web 2.0 community website called IncrediWorld by year end.
In July, rumors swirled that IncrediMail had been approached by red-hot social networking media company Facebook as a potential acquisition target. IncrediMail denied the talks, but has said that it regularly holds discussions with various parties. With nearly $29 million in cash on hand, no debt, and solid profitability, IncrediMail appears to be in a strong bargaining position, but seems happy being independent.
IncrediMail’s most recent quarterly results demonstrate that this microcap play may only be starting to scratch the surface of its long-term profit potential. For the second quarter ended June 30, IncrediMail posted revenue of $4.3 million, an increase of 111% from a year earlier. Net income increased 59% to $0.6 million, or $0.06 a share. For the quarter, earnings before interest, taxes, depreciation and amortization (EBITDA) doubled to $0.8 million from $0.4 million. The biggest driver of this growth was advertising revenue, which hit $1.9 million last quarter, compared with just $0.2 million a year ago. Only over the past few quarters has IncrediMail begun focusing on intertwining Google search advertising into its IncrediMail and Magentic products. This new, high-margin advertising revenue stream should only serve to enhance the firm’s overall profitability.
Over the past year, IncrediMail has significantly boosted its spending on marketing and research and development (R&D) for new products. While this move makes strategic sense for the long haul, it has had a short-term effect of masking the full extent of IncrediMail’s potential “earnings power.” Depending on when and if IncrediMail decides to pull back on marketing and R&D, we think the company could post annual EPS of $0.40 or more. Through the first six months of this year, IncrediMail is on track for annual EPS of $0.30. After backing out roughly $3.00 per share in net cash, this suggests that IncrediMail is trading for just 16 to 17 times its run-rate earnings. We estimate an intrinsic value of at least $10.00 a share for IncrediMail and potentially as high as $12.00.
On Wednesday, IncrediMail closed at $7.88. The 52-week range is $5.18 to $10.69.
With a top-line compounded annual growth rate (CAGR) of nearly 30% since 2002, and a CAGR in operating income of 36% over this same period, IncrediMail has demonstrated that it is not a flash in the pan. There is always the risk that IncrediMail’s consumer products lose their appeal and that it is eclipsed by larger competitors. However, for nearly a decade now, IncrediMail has successfully competed with much larger organizations. The company’s new focus on advertising should help “smooth out” IncrediMail’s lumpy subscription/fee-based revenue in future quarters. Wall Street generally likes improving predictability. Along this same vein, the upcoming IPO of Classmates.com could help draw fresh investor interest in little-followed IncrediMail.
Additional risks include the fact that liquidity in the stock is limited. Plus, IncrediMail is a small foreign company, which might make some investors nervous. Thus, even with good fundamentals, IncrediMail could get unjustly punished in another market correction. Finally, cousins and company co-founders Yaron and Ofer Adler collectively own an over 30% stake. While larger insider ownership can be a good thing, it also means that IncrediMail shareholders likely won’t decide when/if the company decides to sell out.
Bottom-line, we think IncrediMail is an attractive “value find” below the $8 level for medium-risk oriented investors.
