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Archive for March, 2007

Selling Autobytel (ABTL)

March 16th, 2007 by Yehuda Fruchter   |   No Comments

After analyzing ABTL’s latest 10-K and listening to the latest conference call, we decided to sell our shares in the company for a small loss.

Though we didn’t think things could get worse at this consistent underperformer, we were quite amazed to see that the new CEO at Autobytel (ABTL), after nearly 12 months on the job, had actually succeeded in tripling the company’s cash loss in the current fiscal year. And losses should continue for at least the next few quarters, as the company ramps up its new web property at www.myride.com.

Frankly, we see no reason to be bullish on www.myride.com. In fact, the high costs associated with the development and marketing of the new website, seem completely unneccesary. Furthermore, we don’t quite understand why the company even needs to brand a completely new website, given the current traffic figures at www.autobytel.com and its already solid brand within the online auto industry.

It seemed to us that a few changes at www.autobytel.com, should have been enough to kick start revenue growth. This combined with overhead reductions, instead of the increased SG&A management currently forecasts, could have gotten the company back to profitability and positioned it for future growth.

Alas, management has decided on a different strategic plan, which in our view entails more risk for questionable upside. As we have stated in the past, with the Market remaining weak, we’d prefer to allocate cash to companies where the risk/reward is more favorable and where management maintains strong fiscal discipline. These are the types of companies that should reach new highs during the next Bull run. Care for an example of such a situation? Check out our post: Betting on a Flash Future

In addition, in our view the most important aspect of any turnaround is a stabilization of the business and reversal of the cash burn. When management focuses first on growth opportunities at a troubled company, rather than on the above two prior actions, it is generally a signal to sell and move on.

Selling Web.com (WWWW)

March 13th, 2007 by Yehuda Fruchter   |   No Comments

Even though we hate selling stock during major market corrections, we still decided to exit from our remaining position in WWWW following the company’s earnings announcement this morning.

After having waited for nearly a year and half for our investment thesis on WWWW to play out, we think it’s time to book our, now small, profit here and move on.

Today’s report has proven to us that the management team here has little to offer in terms of sustainable and profitable growth strategies. Interestingly, management seems more focused on strategizing about the company’s huge tax loss carryforwards, rather than on improving the bottom-line. Ironically, continued losses keep adding to the value of the company’s NOL’s, but of course minority shareholders will never benefit from this asset under the current management team.

As we have stated in the past, we don’t see much downside in WWWW’s stock given the company’s low relative valuation, but we also fail to see any upside scenario either. With the stock market sell-off gaining steam, there are now plenty of other investment options to consider, which have a more favorable risk/reward profile.

Dealing with Significant Stock Price Declines

March 11th, 2007 by Yehuda Fruchter   |   No Comments

We recently came across a great post by Tom Brown, a leading hedge fund manager specializing in banking and other financially-related equities. By offering a window into the thought processes of a successful investor going thru a major stock correction, we think the article may be useful for other investors facing stock declines, even in non-financial shares.

By way of introduction, Tom, and several other high profile hedge fund managers, have recently been caught long substantial amounts of shares in the sub-prime mortgage sector. That the stocks in this sector, e.g. LEND, NEW, have taken a beating, is probably a major understatement. So what is Tom’s take on the carnage?

“Is the near-term weakness in the names jarring? Of course it is. But regular readers of this site have been similarly jarred before. We went through it with First Marblehead in late 2005, with Capital One in 2003, and AmeriCredit in 2002. Having been through those drawn-out (and ultimately quite profitable for us) sagas, I have long since given up trying to pick precise bottoms or tops. The best I can do instead is to recognize value when it appears–and then act when everyone else has gone off his rocker. Like, say, now.”

Later on Tom comments:

“But I’ve been through this before. If history is any guide, the next few months are going to be a bumpy pain in the neck. But I continue to believe that the long-term reward will be substantial. This is the stock market. A bell doesn’t go off that tells investors when the risk has passed–and when the outlook does finally seem positive, the stocks will have already soared. But to me, the fundamentals are pretty clear, and bullish.”

We don’t really have an opinion on the sub-prime market, but we think the above is great advice for investors in any sector suffering a correction or a bout of extreme volatility.

If you are interested, you can read Tom’s entire article by clicking here.

Potential Upside For Our Fibernet Telecom (FTGX) Estimates

March 6th, 2007 by Yehuda Fruchter   |   1 Comment

This morning Fibernet Telecom (FTGX) announced a colo expansion at 60 Hudson Street in New York City. Since the company was quickly reaching full capacity in its existing colo space, we view this news as very significant, in that it has the potential to provide significant revenue and EBITDA growth, over and above our existing 2007 projections for the company. Importantly, FTGX funded this expansion with existing cash balances and did not take on any additional credit.

We will need to wait for the company’s fourth quarter 2006 results, expected to be released later this month, before fully revising our 2007 and 2008 estimates to reflect this increased colo space. However, we now are more confident in our initial assumptions for fiscal 2007 where we have the company reporting revenues of $50 million and EBITDA of $8 million. Notwithstanding FTGX’s above-average expected EBITDA growth in 2007, simply using the average industry EV/EBITDA multiple of 15X, implies an upside price target of $12+ for FTGX shares, assuming the company meets our projections. However, upside could be more significant should our estimates prove to be too low.

Note: We own shares in FTGX, and first recommended them to paid subscribers at $4.30 per share. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.

Internap (INAP): Expect Upward Revisions, But Sector Dynamics Will Still Dominate

March 4th, 2007 by Yehuda Fruchter   |   No Comments

There is no doubt that Internap’s earnings report last week was simply exceptional. But, of course, “The Market” is always looking to the future, which is why INAP’s projected results are far more important to investors than past reports.

So what’s in store for 2007? Last week, the company announced the following forecast for 2007:

“Revenue guidance of 30% for 2007, which includes the acquisition of VitalStream Holdings, Inc.; Full year adjusted EBITDA is expected to be in the range of $34 to $37 million; Full year expected adjusted gross margin to be approximately 50%; and Capital expenditures are expected in the range of $15 – $20 million. “

Interestingly, this guidance almost exactly matches the forecast we provided in this past post. However, if the past is any guide, Mr. Deblasio, Internap’s CEO, has low-balled Internap’s top and bottom-line prospects in the coming year, especially since the above forecast seems to imply zero growth in the VitalStream/CDN business in 2007, an outcome which seems to us to be highly improbable. Therefore, it seems highly likely that Internap executives will revise their guidance sharply upwards as the year progresses.

The question, though, is whether such revised guidance will help boost the company’s share price.

In all honesty, since we can’t predict the movement of stock prices, we’ll have to plead ignorance on this issue. However, we would remind investors that the valuation of Internap is best approached by reference to the two heavyweights in the company’s industry: AKAM and EQIX.

To the extent that these two companies retain their extraordinary high absolute valuations, it seems likely that Internap’s share price will provide market-beating returns in the coming year, especially if guidance is revised upwards, as we expect.

But, if the ever changing “Market” decides to shift capital away from these highly-valued, and much-hyped, equities, into more attractively-priced tech securities, it’s difficult to see how Internap’s stock price will perform well in this type of environment.

The bottom-line is that we believe that Internap, and many of the other stocks in the IP Services sector, are no longer undiscovered or undervalued on an absolute basis. Therefore, we think that one has to approach these stocks with caution, as the risk/reward is no longer as favorable as it once was.

Please Note: We first recommended Internap (IIP) at $4.00 per share, and still hold a position in the stock. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed
as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.