What to Make of CMGI at $2.50

There is a new sheriff in town as fas as widely held stocks and most actively traded stocks.  It is CMGI (CMGI).  CMGI has been a baffling case and a great turnaround story at the same time.  It is not without its critics, but that is to be expected after the huge run recently and after being one of the dot.com blow-ups of the past.

We noted before its last earnings about the company transforming itself, but it surprisingly didn’t get hit too hard after its earnings when it said that it lost Hewlett-Packard as a main customer.  The forward guidance is what did it and the bulls got behind the company en-masse.  The stock didn’t even lose money the week that the stock market took the nose dive.  It also keeps getting attention as one of the "most picked" stocks on the CNBC investment contest.

These is one other issue that may be really helping behind the scenes.  The company’s recent addition of an investment executive for alternative energy seems to have given the company an entirely new basket of companies that represent a mini-leverage call option that holders now have in potential future alternative energy IPO companies.  That seems to be working.  We have tried to get an interview to evaluate "the other CMGI" that comprises its investment portfolio inside its @Ventures unit. 

Up until January this was only trading a few million shares per day, but since Mid-Bebruary it trades on average well over 10 million per day.  In fact, it has traded more than 50 million shares per day in each of the last two sessions and more than 43 million shares three sessions ago.  The buying-in volume here is almost amazing.

The stock is up more than 40% since right before its earnings.  But now there is a question: Since it has ALREADY hit the $2.50 target that WR Hambrecht issued in its BUY recommendation just on March 9, 2007, will the analyst make an update to the call since it has been such a strong performer? 

This was obviously from someone who was long the stock, but a reader sent me an evaluation where the company had a fair value of $2.42 based on the ModusLink operation.  He also added in $0.10 more for the @Ventures holdings.  Keep in mind that this is NOT our number, and he did disclose to me that he was long or going long in the stock.   

The company had $275 million cash and equivalents as of JAN 31.  The company also listed $842 million in net assets (inclusive of $179 million goodwill) and total liabilities were listed as just under $300 million.  It forecast 2007 revenues at $1.1 Billion, with somewhat improving full year groass margin improvements.

So what I thought I would do on the field was to try to put up a comparison here to other supply chain companies and derive a value IF CMGI traded at the same multiples that its peers did.  This isn’t at all to be considered an Apples to Apples comparison, because many of the companies are Much larger and many are very profitable and don’t have the stigma of having imploded after the dot.com bubble burst.  CMGI trades with a $1.2 Billion market cap as of $2.29 today.  Back in the old days we used to evaluate software companies solely on multiples of revenues.  So, let’s compare 2007 forward year revenues to market caps of other software companies that overlap (Oracle, IBM, SAP removed):

COMPANY                           MKT CAP    Rev.Est.     Rev.Mult.
BEA Systems (BEAS)        $4.64B        $1.54B        2.98X
JDA Software (JDAS)         $447M         $360M        1.24X
Business Objects (BOBJ) $3.47B        $1.4B          2.47X
Quest Software (QSFT)      $1.67B        $595M        2.80X   
i2 Technologies (ITWO)     $536M         $292M        1.84X   
QAD Inc. (QADI)                   $306M         $260M         1.18X

As you will see, the bulk of these trade at multiples that are higher than the 1.1 times forward revenues like CMGI.  It is not fair to instantly say the same thing should happen at CMGI because of the fact that software companies in supply chain and business intelligence are getting harder to directly compare to each other after mergers.  So you could argue that the after the recent rise, that CMGI’s multiple for forward revenues is still about 10% short of the smaller players and significantly under others.  What does @Ventures have as far as "value" in its other investment companies in the Internet/Software and Alternative Energy that can add value in addition down the road?

So, now the wildcards are the trust and the analyst call.  You are trusting forward guidance for any such comparisons, and now we have to wonder just what sort of values you can add in for their outside investments since they are starting to make investments that people actually care about.  That will be for you to decide, but since this has run so much in recent weeks we thought it would be good to draw some comparisons to see what else can be added upon from here.

Jon C. Ogg
March 26, 2007

Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.