interCLICK? 700% Earnings Growth? Time to Research

Well, I was doing some research on Internet stocks and came across this kind of unknown stock called interCLICK which trades at $5 or so a share. It has been trading fairly anemically with only 47,246 shares changing hands today. According to Yahoo the company does the following:

interCLICK, Inc., an audience intelligence and targeting company, engages in developing and executing data-driven campaign strategies for digital agencies and marketers. The company offers interCLICK, an online display advertising network with proprietary data-enrichment technology platform. Its interCLICK empowers its clients to reach desirable audiences in brand-safe environments. The company was formerly known as Customer Acquisition Network Holdings, Inc. and changed its name to interCLICK, Inc. in June 2008. interCLICK, Inc. is headquartered in New York, New York, with offices in Chicago, Los Angeles, San Francisco, Dallas, and Miami.

It seems like a company that serves up value-added advertisments on the internet. The data enriched part is feedback that the advertiser can use to see if their ad is hitting home or not. I'm not sure what companies are using interCLICK but I will check to see who they are and what they do. As the economy improves you will see more ad dollars deployed and in some ways Internet advertising is still cheaper to buy into than other forms of media. The idea of serving up local ads or ads targeted to specific demographics and then getting up-to-the-minute feedback seems worth paying a premium for.

The thing that caught my eye was the 700% earnings growth year-to-year with a PEG rate of only .48 and a price/sales ratio of 1.52. That means you are paying  $1.52 for each $1 of revenue they bring in. That is pretty low for a company that is growing so fast. That 0.48 PEG means that the stock is undervalued as a rule of thumb. So in other words you are paying a discount for that monster EPS growth.

One thing that I wanted to check out was if the company might be takeover bait. Some of the metrics are there but it does have a very high Enterprise Value/EBITDA of 24.41. I was looking through their 10Q and this part jumped out from their Line of Credit from Silicon Valley Bank:

The Loan Agreement also contains negative covenants that limit the Company's 
ability to (or to permit any subsidiaries to), subject to certain exceptions 
and limitations, merge with or acquire other companies, create liens on its 
property, incur debt obligations, enter into transactions with affiliates, 
except on an arm's length basis, dispose of property or issue dividends or make

distributions. 

I'm sure Google or whomever can just drop the $15 million it would need to buy this thing out but it does provide something to think about for the company going forward.

Another potential thorn is that they are being sued by someone named Sonal Bose regarding their use of what is known as "history sniffing"

Recent research from the University of California, San Diego found that Interclick engaged in "history sniffing," a technique that allows websites to spy on their visitors' browsing histories.

Interclick said last month that it used the technique for eight months but ended the experiment in October because it wasn't successful in matching advertisers to groups of Internet users. The disclosure prompted a lawsuit by plaintiff Sonal Bose filed last month in federal court in New York.

That is a potential problem and caused the stock to drop from when this story broke on Jan 3 when the stock dropped to 4.66 from 5.32. The stock has since recovered but it is still kind of an overhang.

However, these sorts privacy lawsuits seem like small potatoes A similar settlement regarding "Flash Cookies" used by Quantcast and Clearspring cost them a total of $2.4 million. If they are found liable interCLICK could pay this out of their cash which sits at $11 million or so. Also since they have stopped doing it then they hopefully won't have to worry if "history sniffing" becomes banned by the FCC.