I first wrote up Incredimail (MAIL) back in July 2008, when the stock was at around $3, and sported a negative enterprise value. Since then MAIL has appreciated dramatically, as the company continues to report strong earnings growth, and perhaps more importantly return excess capital to shareholders via consistent dividend payouts. However, I still believe MAIL at current prices (current price: $8), is incredibly mispriced, and is one of the best values I can find in any Internet advertising business, both public or private.

Today, MAIL reported it’s Q3 results, which again exceeded estimates, despite what is seasonally usually a slow quarter. Management has already increased guidance for the year, and based on today’s number, and considering that Q4 is generally the strongest quarter for Internet advertising businesses, I am confident that MAIL will still exceed their current guidance for fiscal 2009. The numbers at MAIL are currently as follows: 9.8 million shares, zero debt, and and $26 million in cash (adjusting for the future dividend of around $4 million or $0.40 a share). This equates to an enterprise value of $50 million, set against EBITDA of $13 million+ estimated for this fiscal year, for an EV/EBITDA multiple of around 4.

This valuation appears to be extremely low for an online Internet advertising business that generates revenue via Google Adsense. My own personal opinion is that Google Adsense is one of the best businesses I’ve seen in a long time, since it requires nearly zero ongoing cap-ex, or incremental fixed costs. One simply monetizes website traffic via Google’s PPC program and receives payment from Google on a monthly basis. It is a veritable cash machine, as reflected in MAIL’s margins.

I find it interesting that the nature of GOOG’s monopolistic, and highly profitable, online advertising model is very apparent to investors in GOOG, as reflected in GOOG’s high valuation multiples. However, for some reason, companies, like MAIL, that actually generate the business for GOOG (i.e., the partner sites), remain at incredibly low valuations that are generally applied to old media companies with significant leverage and negative growth. I do not think this type of valuation discrepancy between GOOG itself and a major partner site, can last long, as MAIL would make for a very attractive acquisition for a larger Internet advertising business. I also believe that since management of MAIL has already proven themselves to be shareholder-friendly, that they will pursue some sort of value-enhancing transaction should MAIL’s stock price continue to trade at a depressed level.

Disclosure: Affiliates of Envoy Global Research, and its principals, own shares in MAIL. 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.