Constant Contact (NASDAQ:CTCT) is a provider of online marketing and social media engagement tools for small businesses. Its online marketing products consist of various email and event marketing tools. The company also provides marketing engagement campaigns by promoting business offers through various social media platforms such as Twitter (NYSE:TWTR), Facebook (NASDAQ:FB) and LinkedIn (NASDAQ:LNKD).
Revenues for the online marketeer grew at an annualized rate of 37% between 2007 and 2012. However, the top line growth rate has seen a consistent deceleration in recent quarters. The first three quarters in 2013 registered revenue growth of 13.8%, 13.2% and 12.8%, respectively. The main factor attributable to this deceleration is rising competition in online marketing, which has resulted in lower conversion of free trial subscribers into paid subscribers, as customers choose the competitors and alternatives over Constant Contact. In 2012, the company’s customer base expanded 13% to reach 527,000 customers compared to growth rates of 30% and 20% in 2010 and 2011, respectively.
In this article, we highlight the trends influencing the online marketing industry.
Factors Driving Growth In The Digital Marketing Industry
Strengthening U.S. Economy: A stronger economy generally increases investments in marketing activities, especially from small enterprises looking to scale their operations in these favorable times. This is a positive for Constant Contact that derives approximately 90% of its revenues from the U.S. Given that the U.S. economy has shown signs of strengthening, we expect an increase in ad spend and marketing expenses from small enterprises in a bid to expand their customer reach. On the flip side, any increase in interest rates in the U.S. that result from the wind-down of the Fed’s QE program could temper investment by small enterprises in Constant Contact’s products.
Increasing Social Network Integration: Constant Contact’s typical customers are small businesses, which typically lack dedicated budgets marked for marketing initiatives. As opposed to traditional offline marketing solutions, online marketing tools provide businesses with immediate impact on a large scale at low prices. The prospects of gaining a wide reach with relatively low spending is driving growth for digital marketing among small enterprises. Additionally, the integration of social media into business processes is increasing within the U.S., as the average time spent across various social media networks continues to rise (according to eMarketer.com). An increase in time spent on social media networks translates into higher page views per person, increasing the conversion rate for a social media campaigner. Video-based engagement marketing is also on the rise as the percent share of average time spent on visual media continues to grow. 
Big Data Insights: The use of big data and analytic platforms, such as Facebook Insights and Google Analytics, to develop targeted marketing campaigns for customers is set to increase in the future. Small enterprises are expanding their exposure to various analytic tools to better market their products and services to a specific band of customers. An increase in demand for targeted marketing campaigns should induce growth in Constant Contact’s top line. The company expects greater leverage of its analytical capabilities from small enterprises in 2014.
Our $21.15 price estimate for Constant Contact’s stock is approximately 25% below the current market price. However, a top-line growth greater than our present estimate of 13.2% for fiscal 2013 could provide upside to our price estimate.Notes:
- Constant Contact Predicts Big Data Insights Help Small Businesses Market Like Giants in 2014, Constant Contact Pressroom, December 2013 [↩]