This weekend we gave many updates to our favorite stocks in the under $10 category.  Of our stocks, Web.com (NASDAQ: WWWW) remains perhaps the cheapest of the internet stocks which fit within our screening criteria.  Web.com is the old Website Pros, Inc. which traded under the "WSPI" ticker, and this stock has been poorly treated by the current market. 

This company is partly a market victim, but it has also been victim ofthe traditional sell-off after its acquisition, re-branding, namechange, and stock ticker change.  That effort frequently causes greatinvestor confusion and can create a multi-quarter problem in many caseswhere online quote and research services have major holes in accuratecoverage data.  That is still the case today.

But this company stole the old Web.com and former Interland for a songand is essentially the poor man’s alternative to VeriSign (NASDAQ:VRSN).  The company offers almost all of the same web hosting and weboffering packages at a far more reasonable cost.  We know thispersonally and from first hand experience. We also notified our special situation readers when VeriSign was above $39.00 that the stock was poised to go to $30.00 or under because of many web trends and industry changes on top of its own internal issues.  Those shares closed under $25.00 yesterday.

We featured this over the weekend as one of the best value stocks in web names in the weekly stocks under $10 newsletter.  Its market cap is a mere $145 million after Monday’s sharp sell-off andthe 4% recovery today still has it at a mere $5.20.  It has about $1.15cash per share, or at least that was the case before its recent $20million share buyback.  The stock does not have stock optionsavailable, and that is one issue we would like to see changed.

Its most recent guidance for 2008 on non-GAAP net income of $0.73 to$0.76 on revenues of $124 to $125 million.  This gives forwardmultiples on the lower end of its targets 7.1-times non-GAAP earningsof and 1.17-times revenues.   When we look at next year’s estimates of$0.88 non-GAAP EPS and $134 million in revenues, those multiples goeven lower.

The company’s churn was down last quarter to 3.9% from 4.1% the priorquarter and it still managed to grow clients to 271,000 from 270,000the previous quarter. Our own base case model was planning forcontractions in subscribers and therefore higher churn.

While the recent turmoil is creating an environment where 7-week oldguidance is as reliable, the valuations here look more thancompelling.  The company cannot be immune, but its lower cost offeringsdo offer some insulation which other web hosts and web servicesproviders have. When the environment for liquidity and mergers becomesmore stable, we think this could be an easy roll-up play for any largeweb services company.  We don’t expect this one to be immune to thecurrent situation. This one came back under $10.00 with far too muchvengeance.  Can it get worse? Of course. That is a risk inherent inany value and growth stock which is subject to the economy, and the market is nuts right now. 

We believethis can go back above $10.00 when the climate is remotely stable,although in the current market we admit that level will be harder andharder to see in the near-term as that is now nearly 100% higher than today’s price.

Jon C. Ogg
September 30, 2008

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