Facebook Inc. (NYSE: FB) has had quite a ride since its initial public offering. After generating unparalleled buzz in the secondary markets, the stock fell nearly 54% from its $38.00 IPO day high to a low of $17.55 before recovering to its current ~$30.00 price. But, it’s this recovery that investors should be watching, with the stock rallying some 56% over the past three months.
Many other social media companies have seen a similar rise over the past three months, including LinkedIn Corporation’s (NYSE: LNKD) 11% jump, Zynga Inc.’s (NASDAQ: ZNGA) 5% jump, and even Groupon Inc.’s (NASDAQ: GRPN) 4% jump. The result could be a promising upturn in the Internet sector as the U.S. economy continues to show signs of improving.
With Facebook set to announce earnings on January 30th, investors could see a further upturn in the social media space. But, instead of looking at these popular Internet companies, investors may be better off looking for the proverbial diamonds in the rough using alternative valuation methods that may more accurately reflect near-term opportunity.
Forget Multiples, Look at Book Value
Many social media companies are valued based on revenue or earnings multiples, since the sector tends to produce greater growth rates than the general market. Unfortunately, social media stocks are well known for their lofty valuations that can prove quite volatile, from Facebook’s struggle to find a fair valuation to the crash of Groupon’s stock following its IPO.
So, how do investors find real value?
While social media stocks are often better known for their liabilities than assets, looking at book value provides an interesting data set for investors to consider. After all, companies trading at low price-to-book valuations usually don’t remain that way for very long, with potential acquirers or activist investors swooping in to close the valuation gap.
Comparing Valuations to Find Opportunity
The most popular companies in the social media space include Facebook Inc. (NYSE: FB), LinkedIn Corporation (NYSE: LNKD), Zynga Inc. (NASDAQ: ZNGA), Groupon Inc. (NASDAQ: GRPN), and Yelp Inc. (NYSE: YELP), but there are also some smaller players with attractive valuations that investors may want to consider – namely CrowdGather Inc. (OTCBB: CRWG).
Here’s a comparison of these stocks:
Note: Data from Yahoo! Finance
CrowdGather has the lowest price-to-book valuation, while Groupon has the lowest price-to-sales and PEG valuation. Groupon may have these low numbers because of questions surrounding their business model, but CrowdGather appears to be trading at a legitimate discount that warrants further investigation by investors.
Looking at CrowdGather’s Discount
CrowdGather operates a leading network of online forum communities, as well as a forum-centric advertising platform. With an estimated 175 million monthly page views, the company’s online properties generate large niche audiences that are perfect for advertisers, with a greater propensity towards purchasing, sharing and recommending products.
Based upon their last financial filings, revenues for the six months ended October 31 of fiscal 2013 came in at $1,014,934, which was an increase of 26% compared to the first six months of fiscal 2012. Gross profit for the six months ended October 31 of fiscal 2013 was at $995,718, and that was up 44% compared with the first six months of fiscal 2012. However, investors may be even more impressed with the company’s $1.2 million in cash and $15.1 million in shareholders’ equity – high amounts for a $4.5 million company.
Breaking these numbers down, the company’s balance sheet consists of $1.2 million in cash, $1.5 million in current assets and $9.4 million in intangible assets ($7 million in forum property valuation, $2.25 million in advertising technology, and just $190,000 in trademarks and trade names) with $369,000 in current liabilities and no long-term debt.
With $15.1 million in shareholders’ equity, a potential investor could currently buy the company’s shares for around 30 cents on the dollar since CRWG is currently trading below its book value. Many companies may be interested in such forums and ad technologies, including content firms like IAC/InterActiveCorp (NASDAQ: IACI), AOL Inc. (NYSE: AOL), Demand Media Inc. (NYSE: DMD), or even ValueClick Inc. (NASDAQ: VCLK).
Unique Investment Opportunity
CrowdGather Inc. (OTCQB: CRWG) represents a compelling investment opportunity for value investors willing to assume the risk of a microcap stock. With a market capitalization of just $4.5 million, the stock trades at a significant discount to its book value, particularly when subtracting out the company’s $1.2 million in cash, as disclosed in the company’s latest public filing.
Meanwhile, the company’s promising new forum advertising technology (to appear in financial results starting next quarter) and leading network of online forums make the stock a potential acquisition target. These sentiments are underscored by research showing that forum goers are ideal demographics for online advertisers, if only they reach the right scale.
For more information, check out the following resources: