Novice Investing - InfoSpace In Vacuum

Date: Friday 29th 2008f August 2008 09:50:25 PM

InfoSpace In Vacuum - 09/27/2006

By: Novice Investing Staff

We are always on the look out for stocks trading at high cash value. The reason is simple. When company gets into trouble, their high cash pile will save the day. It can afford to lose money temporarily while developing profitable business line.

Infospace (INSP) might fit that criteria. It has sunk to $ 18 per share for a total market cap of $ 570 Million. Meanwhile, it has $ 400 Million cash in the bank and no debt. That is almost $ 12.5 per share or 70% of its stock price. What causes the selloff? The culprit is the announcement that InfoSpace has lost a major customer who used to purchase ring tones from it. That customer is perceived to be Cingular, representing about 33% of total company. Meanwhile, it represents 69% of mobile segment revenue, which we believe will go towards zero. Why? As technology advances, middleman is eliminated. In the case of Cingular, the company can negotiate the right to distribute ring tones to the music label itself.

Wallstreet basically has given up on InfoSpace to book any profit this year. It is slated to post a small loss of $ 0.02 for the year ending on December 2006. With this announcement, we believe that InfoSpace will go into the red for fiscal year 2007 as well. Losing 33% of your total revenue in one night never looks good even when it happens to a juggernaut like Microsoft. For 2007, surprisingly, analysts estimate another small loss of $ 0.09. That is an unlikely target to be hit. Unless, InfoSpace has a major product breakthrough, it will be hard to replace 33% of its revenue and perhaps most of its mobile segment revenue. So far, we hasn't heard of any new products coming off soon.

What is a good estimate of InfoSpace's profit/loss for the coming fiscal year? The online business is a volatile business where stars can be born within days and heroes can fall within minutes. Let's make a reasonable estimate. Revenue for providing snippets of popular songs is $ 110 Million business for InfoSpace. Assumes that this all goes to zero, that is an aweful lot of revenue to be replaced. There is still hope of growth in InfoSpace's mobile content revenue from other services such as portal service but revenue base is not that big. Assumes a scenario where InfoSpace lost $ 100

Million in revenue and 51% historical gross profit margin, the company loss will increase by $ 51 Million annually. This excludes any head count reduction, which may or may not happen. Further, assuming that all other segment can grow 10% a year, we can calculate when InfoSpace will be back to break even point.

Fiscal Year	Revenue	Profit/Loss	Earning/Loss Per Share
2007	$ 272 Million	( $ 53.8 Million )	( $ 1.68 )
2008	$ 299 Million	( $ 39.9 Million )	( $ 1.25 )
2009	$ 329 Million	( $ 24.7 Million)	( $ 0.77 )
2010	$ 362 Million	( $ 7.9 Million)	( $ 0.25)
2011	$ 398 Million	$ 10.6 Million	$ 0.33
2012	$ 438 Million	$ 31.0 Million	$ 0.97
Constant Revenue and profit afterwards

Let's look at the table for a moment. That said that InfoSpace will be earning $ 0.97 by 2012 after four years of consecutive loss. At this point, will there still be cash left on InfoSpace's balance sheet? The answer is yes. Currently, it has $ 400 Million in the bank or $ 12.5 per share. Assume the above scenario, by 2012, InfoSpace will have ( $ 12.5 - $ 1.68 - $ 1.25 - $ 0.77 - $ 0.25 ) = $ 8.55 of positive net cash when it achieves break even. At current price of $ 18, by the year 2012, InfoSpace is trading at 10 times earnings, six years from now.

Is there any hope yet for InfoSpace? It seems that way from the above exercise. We assume a no breakthrough product from InfoSpace as it crawls back to profitability. Also, we assume 10% revenue growth and 51% gross margin which may change dramatically if they can come out with new product offerings. With that in mind, InfoSpace can be in your research screen for potential investment. Now, we have not looked at other InfoSpace's business yet. However, if you can buy it at $ 12.5 per share where the total cash is worth, it might be once in a life time opportunity.

END

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding InfoSpace Inc. (INSP) or any other securities.

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