We maintain our long-term Neutral rating on ValueClick Inc. with a target price of $18.00. ValueClick reported strong second quarter 2011 results, beating the Zacks Consensus Estimate by a nickel. The better-than-expected results were primarily driven by strong growth across all business segments.
We are positive on ValueClick’s long term growth based on strength in the Internet advertising industry, increasing e-commerce spending, improving display ad growth trends in the U.S., synergies from the Investopedia and Dotomi acquisitions, impressive cash flow and a debt-free balance sheet.
Moreover, to maintain margins and combat the difficult macroeconomic environment, ValueClick divested a number of underperforming assets over the past few years.
The company’s international business is also on the growth path. Although the challenging macroeconomic environment, particularly in Europe, could hurt international business going forward, we expect the company to post higher revenues in 2011, led by a gradual improvement in economic conditions.
ValueClick has been on an acquisition spree and is acquiring companies that are easy to integrate within its own business. We believe the acquisitions will drive higher synergies in the segment as it will consolidate ValueClick’s foothold in the online financial services ad vertical and generate organic traffic growth.
However, the near-term outlook is not so bright, with the sluggish US economy continuing to hurt ValueClick’s top-line growth. Although the company achieved a modest 2.0% year-over-year growth in fiscal 2010, revenue growth remained below the pre-recessionary level.
ValueClick faces stiff competition, not only from direct competitors, but also from the websites it advertises on. Directly, ValueClick competes only with Marchex for placing Web advertisements on affiliate networks. However the situation could change in the not-too-distant future, as advertisers are likely to go directly to website publishers to buy advertising space, eliminating the need for ValueClick’s services.
Additionally, major web portals such as Google Inc. , Amazon.com Inc. (AMZN - Analyst Report), Yahoo! Inc. (YHOO - Analyst Report) and MSN that have entered ValueClick’s display advertising space may increase competition for the company.
Currently, ValueClick has a Zacks #3 Rank, implying a short-term Hold rating.