Sunday, February 13, 2011

High P/E, high hopes at

Interested in buying a stock with a price/earnings ratio of 55 on a trailing basis and 35 on 2011 expected earnings. Try I have a toe in the water at $34, bought on January 14. Now it's at $37.30 which is an immaterial advance relative to what may be expected in the future.

The mission of is "to help everyone discover, preserve, and share their family history". They have an extensive data base and at this point one million paid subscribers. In some form the company has been in business since 1983 and has had an online presence since 1997. Only in the past six years has it become a robust website with a wide reach.

If the quality of the management team and Board of Directors can be measured by academic degrees and experience in online businesses, this is an exceptional company. Harvard, Columbia, University of Chicago, Stanford, Dartmouth, Georgetown, and UNC are the links among the team. If the current list of the largest institutional shareholders could be indicative of support, it's an A list with only one indexer among the top 10 holders, unusual these days.

The company went public in 4Q 2009. Since then revenue growth has been at a 33% pace. It is consistently profitable but at this point has only a 12% return on equity. $290 million of goodwill is being amortized, which reduces accounting net income but of course has no impact on cash flow. As of 3Q 2010 the company has no long term debt and $340 million of shareholders equity.

The IPO price in 4Q 2009 was $16. For three quarters the company bounced around $20 a share but since September 2010 it has risen from that level to todays $37. Did we miss the move? Is it priced too richly? Could be, but shareholders of Chipotle, Netflix, Amazon, and Lululemon would have never chalked up their huge gains if they had not seen the potential despite high p/e ratios and charts that had already posted significant gains.

It's a risk at these levels, no doubt about it. I see two reasons to look for significant growth in revenue and earnings over time. First, the platform is built and fixed capital investments are not necessary. Leveraging intelligence and creativity is the path to growth. More intense marketing will come with rising revenues that can partially be committed to broadening recognition. Second, the Facebook phenomenon seems to be, among boomers, a forum for reviving the old days, high school, college, even elementary school and kindergarten. If the boomer generation is so focused on stepping back in history now, it makes sense that as the group ages further the attraction of defining family legacies could grow.

There have always been individuals who enjoyed researching geneology. My grandfather on my father's side was one of them. So was one of my father's co-workers. They were into it big time. The potential for this outlet for validation to grow is now immense, just an opinion but one that is strongly held here.

We'll see. If the stock corrects sharply for simply valuation reasons it should be bought. That opportunity, however, may not come. We'll see, see if I get egg on my face or a hole in my pocket.


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