Constant Contact’s Growth Potential And Improving Portfolio Support $17 Fair Value

by Trefis Team
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Constant Contact
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Constant Contact (NASDAQ:CTCT) stock price declined by almost 15% after it released its annual earnings on January 31. The company reported revenues of $252 million, about 18% y-o-y growth and was able to sustain its high gross margins of almost 70%. However, the Constant Contact’s inability to gain from the large investment in SinglePlatform resulted in its net profits declining from about 11% of sales in 2011 to 5% in 2012. We believe that the market has been unfairly bearish about the company as it has a diversified product portfolio with which it can help the approximately 28 million small firms in the U.S. with their marketing needs as they battle tight budgets in a struggling economy.

Here, we take a look at factors which support our $17 estimate for the company, which is 30% higher than the current market price. Constant Contact competes with the likes of Groupon (NASDAQ:GRPN), Living Social, Eventbrite, iContact, Surveymonkey as well as Salesforce.com (NASDAQ:CRM).

Check out our complete coverage of Constant Contact

Large Potential In An Untapped Market

The National Economic Council estimates that almost 28 million small firms in the country are struggling with tight marketing budgets due to a persistently weak economy. ((Moving America’s Small Business And Entrepreneurs Forward, Small Businesses Administration, May 2012)) Constant Contact currently counts only slightly more than half a million small businesses as its customers. This leaves a large untapped market waiting to be captured. Social network based promotions are the new marketing success formula, and Constant Contact with its suite of affordable tools for email marketing, social media marketing, event marketing, local deals, digital storefronts and online surveys, should be able to significantly expand its customer base. The company maintains relationships with its customers through local seminars, personal coaching and product support. We expect that the word of mouth promotions and company’s penchant for providing customer friendly service, will further increase the retention rate and support growth in the number of customers.

User-based Growth Set To Accelerate

The company added 45,000 new and 15,000 net new customers during Q4 and ended with about 528,000 customers. Part of this growth was driven by the induction of new products in the company’s portfolio. However, the growth was slower than expected as new products struggled to gain popularity. For example, Social Campaigns was launched in early 2012 and generated more than 120,000 users, but the number of paying users among these users was below expectation, and as a result, the company is now focusing on retuning its pricing, positioning and selling process in 2013. We expect similar efforts to be afoot to increase the monetization of other products, and these efforts to bear fruit in the near-term. Besides improving the user experience for its products, the company also plans to invest in and develop mobile and loyalty marketing solutions. We expect mobile solutions to be an important growth driver in the near future.

Expenses Expected To Keep Growing

The company’s operating expenses aside from the acquisition costs grew by almost 22% y-o-y to $174.5 million in 2012. The sharp growth in expenses was partly because of the acquisition of SinglePlatform and CardStar’s team and partly because of the company hiring personnel to bolster its efforts to become a multi-product company. However, the growth in expenses was not commensurate with the growth in revenues.

Constant Contact is currently working on improving user experience for several of its tools and will have to do so consistently in order to stay competitive. We expect its research and development expenses to keep rising as it innovates and expands its product portfolio. We also expect the sales and marketing expenses to keep at current levels as a percentage of sales, as the company promotes its tools and services across various media formats such as television, radio and online mediums.

We believe that the market has been too harsh on the company. The size of the market opportunity, its diversified product portfolio, a newly appointed sales team which is expected to be more productive over the next year, the potential for recently launched tools combined with aggressive promotions support its growth prospects and our price estimate for the company.

We have a $17 estimate for Constant Contact, which is at 30% premium to the current market price.

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