Ancestry.com Is a Solid Short for Hedge Funds
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Ancestry.com (NASDAQ: ACOM)
(This write-up is an edited and greatly-abbreviated pitch from the SumZero community.)
Recommended Action: Short
Current Price: $30.30 Target Price: $13.00
Source: Hedge Fund. Washington, DC.
Quick Pitch:
Over the past few quarters, sell-side analysts have been predicting 'significant growth’ for Ancestry.com and estimate 50% subscriber base growth for the website by the year-end 2013. Analysts claim that Ancestry.com’s social network and new subscription pricing plan are the prime drivers for this projected growth.
My research, however, indicates that several factors undermine sell-side analysts’ optimism. Specifically, (1) a new monthly subscription plan, (2) a defunct social network, and (3) decreasing popularity of (and the possible abandonment of) the NBC show “Who Do You Think You Are?” will lead to slower than expected growth for Ancestry.com.
Key Points:
- Ancestry.com has already exhausted the base of its most loyal customers who are interested in finding and constructing their family trees. The new monthly-subscription plan indicates that the most experienced and interested subscribers have saturated and that the company is now looking for a new subscriber base. Though the monthly plan gives Ancestry.com access to a new class of subscribers, it also points to a deteriorating customer base: from a loyal, experienced and long-term base to one that is characterized by curious, but temporary subscribers.
- One of Ancestry.com’s major problems is the higher churn rate of the more popular monthly subscriptions. This attrition rate helps demonstrate that people subscribe, find all relevant information about their family and quit paying for access to Ancestry.com materials.
- Contrary to management’s and sell-side’s assurances, Ancestry.com’s social network does not create a sticky customer base. Only 36% of its subscribers actually log on to the website once a week and 56% users sign on the site once every 30 days. In comparison, more than 50% of users log on to Facebook at least once every day. Low user involvement and user fatigue will increase non-use and may contribute to even higher churn rates.
What to Watch for:
1. Churn will increase as the shift to monthly subs continues. If implemented, the new pricing plan will further increase churn. More online, competitive offerings and the number of existing family trees will shorten subscribers' stay on Ancestry.com.
2. Increases in gross membership levels in 2012 due to another season of NBC's 'Who Do You Think You Are' reality TV program. Low subscription growth as witnessed in recent quarters will continue to flatten. Then, over 2013 and beyond, these should decline rapidly.
Quick Valuation:
With a 3% perpetuity growth rate and 10% discount rate and the above stated drivers for subs growth, the company comes at a valuation of $12.85, or ~55% at discount from today’s stock price.
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