Blackboard Has Opportunity Written on It

High expectations could spark some selling -- and provide an entry point.
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A student of mine at Seton Hall University, where I am a professor of finance, came up to me in the school's trading room while I was in the midst of some trades to ask me what I thought of

Blackboard

(BBBB)

. I replied that it was a useful teaching tool.

Blackboard produces unique Internet-based systems predominately for the education industry. This system allows faculty to share information with students, post grades, disseminate information and email, and store files for later use to share within a particular class or other defined user groups. It is a great way to increase productivity.

But this student meant the stock.

I followed the stock after its tremendous IPO, but have since kept it at a distance from an investment point of view. However, as I have become a more frequent user of the system, my interest in the company as an investment has increased. So, with an earnings release due after the close on Monday, this gives me the opportunity to take a hard look at the company.

Blackboard's revenue has grown steadily quarter to quarter since going public. And after burning off some early upfront expenses, EPS have grown sequentially as well. BBBB's ability to grow operating margins is also nothing short of outstanding.

Analysts are expecting BBBB to earn 26 cents on revenue of $36.62 million. However, BBBB has been adept at surpassing analysts' estimates: For example, it surpassed third-quarter 2005 estimates by 11.6%, second-quarter 2005 estimates by 19.6%, first-quarter 2005 estimates by 30.7%, fourth-quarter 2004 estimates by 56.2%, and third-quarter 2004 estimates by 63.2%.

The risk here is that, given this track record, the Street is most certainly counting on BBBB to print a number well in excess of its expectations -- the old whisper-number game. So any EPS results less than, say, 29 cents, could spur some selling.

I will be looking closely at revenue growth; the ability to maintain the high margins (third-quarter 2005 gross margins were 70.5%, operating margins were 16.9%, and net margins were 18.1%); and perhaps the most important factor, an indication of future growth. Given the vast quantity of colleges, universities and companies that have yet to install a Blackboard system, I believe the company has a tremendous opportunity for future growth, so I will be looking for color on that issue. Commercial applications are as of yet untapped as well.

Just this week, BBBB received regulatory approval for the acquisition of Web Course Tools (WebCT), a privately held educational software developer. The stock jumped nearly 2.5 points on that news. I am also anxious to obtain more information on this acquisition, which could have accretive value to BBBB.

The short interest in BBBB has backed off significantly, leading me to believe that whatever bears there were in this name are well aware of the company's prospects.

In fact, the more I think about it, the more I want to kick myself for not being in this name. Perhaps some anxious profit-takers will provide us with that opportunity.

At the time of publication, Rothbort had no postion in the stock mentioned.

Scott Rothbort has over 20 years of experience in the financial services industry. In 2002, Rothbort founded

LakeView Asset Management, LLC

, a registered investment advisor based in Millburn, N.J., which offers customized individually managed accounts to its clientele. In addition, LakeView Asset Management, LLC has developed and manages trading of long/short proprietary index strategies. Rothbort is an adjunct professor at the Stillman School of Business at

Seton Hall University

. Prior to that, Rothbort worked at Merrill Lynch for 10 years. During his tenure at Merrill, he was instrumental in building the global equity derivative business, started and managed the global equity swap business and oversaw and coordinated the secured funding, collateral management and collateral identification for the global capital markets group and corporate treasury of Merrill Lynch.