I’ve been following MAIL since mid-2008 and 2010 was surely a volatile year for the company’s shares. Fears over the loss of Google caused a sharp decline in the shares, but as speculation of a renewal surfaced and a final deal was consummated, the shares rallied sharply.

Despite the recent rally in the shares, I think MAIL still has room to appreciate (Current Price: $8).

What Has Changed?
As referenced above, the company renewed its agreement with Google late in 2010, removing the primary risk for the shares. In addition, the company today announced strong guidance for 2011, indicating that even with growth initiatives it expects to earn nearly $8 million in 2011 with double-digit top-line growth. Finally, there is a huge bubble ongoing in private Internet companies that trade on private exchanges. I fully expect this private bubble to seep into public markets in 2011, where many Internet companies trade a ludicrously low valuations when compared to their private peers. Interestingly, the private companies that have soared in value, do not have long operating histories and are by many measures much riskier than their public counterparts.

So why the bubble in these private companies? As always, illiquidity combined with limited financial disclosures and dealer controlled pricing, have all led to complete insanity. But, the bubble is not ready to pop yet, given the only recent entry of Goldman into the private exchange trading business via its Facebook investment. Moreover, as the bubble continues to inflate the huge discrepancy between private and public valuations simply cannot be sustained as this would lead to significant M&A activities as the private companies acquire or merge with their undervalued public counterparts. So overall, expect huge investment gains in “undervalued” public internet companies, like MAIL, in 2011.

Risk
The main risk I see for MAIL is the depletion of their growing cash pile (last quarter at around $32 million) on a silly acquisition at an inflated value. Since many private Internet companies are now valued absurdly, this is a salient risk. However, since investing in MAIL nearly two and half years ago, I have been quite impressed with management’s interest in shareholder value, as evidenced by the company’s previous dividend policy and strong record of free cash-flow. So I am somewhat confident that the largest shareholders of MAIL will be quite prudent in their acquisition strategy and I see it as unlikely that the Adlers will hurt the value of their shares with an overpriced acquisition. Their history with the company surely shows a careful consideration of shareholder value and capital.

Reward
Given the valuation of similar private companies, I see no reason why MAIL should be valued at its current discounted price of about 5X EV/FCF. I expect the stock to appreciate significantly as the public markets adjust to bubble valuations in the private sector and as more investors rush to take advantage of “cheap”public Internet plays.

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.