A week ago today, the shares of Ancestry.com (NASDAQ:ACOM) dropped 14% on the news NBC was cancelling Who Do You Think You Are, produced by former Friends star Lisa Kudrow and featuring advertising and product integration by the company. The show generated an increase in new subscribers in both the first and second seasons and most likely in the third as well, although it’s too early to tell.
So, the cancelation is a costly blow for sure, but it’s not the end of the world, even though investors have knocked Ancestry’s stock down 42% in the past 52 weeks. To the naysayers, I say “thank you.” Opportunities like this don’t come along very often. Don’t let it go by.
Ancestry’s largest shareholder is Spectrum Equity with 30.1% of the outstanding shares. Spectrum invests in the information economy. Since 1994, it’s raised six private equity funds totaling $4.7 billion. In October 2007, it along with some other partners, acquired Ancestry.com for $355 million with Spectrum investing $138.6 million of its own cash in the deal.
Two years later, it took the world’s largest online resource for family history public at $13.50 a share. In the initial offering, as well as two subsequent offerings in November 2010 and May 2011, it’s realized $360.1 million in net proceeds for a profit of $221.5 million. Specturm still has 13.3 million shares to dispose, and you can bet it won’t be selling until the shares are back in the $30s, if not the $40s. After all, it has already got its dime out in less than five years. Another year shouldn’t be a concern.
While the loss of the show will hurt its subscriber growth, management will figure out other ways to promote Ancestry’s services. For example, it announced in April that it’s buying smaller rival Archives.com, which has 380,000 subscribers, for $100 million in cash and assumed liabilities. While the two sites will operate separately, they’ll be able to combine the best parts of each business to deliver an even better user experience.
Frankly, I find genealogy fascinating, and I don’t think I’m alone. Just the other night I did a search of my maternal grandfather, who grew up in Minnesota. At age 29, he moved to Toronto. Ancestry found a border crossing from the U.S. into Canada on September 21, 1930, as well as several passenger lists of him traveling to New York and elsewhere on business.
The more extensive its database becomes, the harder it is for anyone to challenge what Ancestry does. That’s what I’d call a wide moat.
On May 14, Valentum Securities wrote an article pointing out that database firms Morningstar (NASDAQ:MORN) and Factset (NYSE:FDS) trade at 23 times 2013 forward earnings, more than double Ancestry’s valuation. Yet Ancestry has increased operating earnings in six out of the last seven years from $8.2 million in 2004 to $95.5 million in 2011. That’s a compound annual growth rate of 42% a year. Neither Morningstar nor Factset can claim such growth.
The mispricing simply makes no sense. In the first quarter ended March 31, Ancestry’s revenue grew 19% year-over-year to $108.5 million, subscriber growth by 16% and operating income 42% to $20.1 million. It will continue to do well because while it costs $84.70 to acquire a new subscriber, Ancestry then derives monthly revenue of $18.50, meaning it takes less than half a year to pay for each subscriber, who then provides recurring revenue indefinitely. It’s a very smart business model.
Lastly, and perhaps even more promising than the Archives acquisition, is its new AncestryDNA program that’s rolling out in 2012. For $99, you’ll be able to have your saliva sample analyzed for DNA matches, potentially opening up your family tree to cousins you never knew you had in the most unexpected of places.
With almost 1.9 million subscribers and another 380,000 from Archives.com, we’re talking about $22 million in additional revenue if just 10% of the subscriber base takes advantage of the test. More important, I believe the test will attract new subscribers, adding to the already substantial recurring revenue.
When Ancestry.com went public in November 2009, its enterprise value was 11.6 times EBITDA. Today, even though it’s making a lot more money, its enterprise value is 6.1 times EBITDA. I’m not sure what the 40% of investors who are short see in its business model that’s so negative, but I see a business that’s meeting a need and making good money doing it. Last time I checked, that was a good thing.
As of this writing, Will Ashworth did not own a position in any of the stocks named here.
