Targeting Low-Priced Internet Takeovers

On Aug. 2, iVillage reported break-even second-quarter earnings on revenue of $21.1 million. This was ahead of analyst expectations and sent the stock up by 12% in the following trading session. On a year-over-year basis, revenue increased 28% and was slightly ahead of the company's guidance of $20 million to $21 million.

And break-even earnings-per-share results, although flat with year-ago results, beat the Street's expectations by a penny. The company's flagship site, which represented about 75% of total sales in the quarter, turned in 65% year-over-year revenue growth, driven by strength in advertising revenue.

The company maintained its full-year revenue guidance of $87 million to $89 million, and said it still expects to generate between $17 million and $18 million in EBITDA and net income of between $9 million and $10 million. We believe these numbers are attainable, given the company's strong earnings to date, and the potential for strength in advertising sales heading into the holiday season.

To be sure, iVillage's 391 million page views in June hardly matches the 7.8 billion page views Intermix generates each month. But we believe what iVillage currently lacks in size, it makes up with a more targeted customer base.

Its content attracts young and middle-aged women, a market that it dominates online. With women spending almost as much money on the Web as men -- 57% of men in a UCLA study said they make purchases online vs. 45% of women -- it's easy to understand why a traditional media firm would want a piece of iVillage's market in looking to spread its online wings. Additionally, iVillage's 17% EBITDA margin is much greater than Intermix's 3.5% EBITDA margin, meaning each dollar in sales is worth more to a potential acquirer of iVillage than that of Intermix.

With that in mind, we believe it is fair to apply the 5 times sales and 38 times EBITDA that News Corp. bid for Intermix. On this basis, iVillage shares are worth as much as $9 each in a buyout. We believe this is a fair way to value iVillage because its most recent quarterly earnings results were impressive.

Risks to our thesis include a slowdown in the growth of online advertising, company-specific execution problems such as down time on its sites due to technology problems (which has been a problem in the past), and a slowdown in the shift of advertising budgets to online media.

That said, the 20% in upside potential represents a compelling opportunity for risk-tolerant investors to get involved in a name with double-digit revenue, positive EBITDA and earnings growth, all at a discount to what acquirers have recently been willing to pay for Internet stocks.

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