Programming note: we’re doing something a little different this week with a deep dive on Yelp. If you like this type of content, let us know in the comments.

Introduction

Yelp is one of the least covered mid-cap companies, and the reason is simple: It’s perceived as a boring company. Although that statement isn’t far from the truth, there’s also a lot to learn from it.

Yelp was founded 2 decades ago (in 2004), by Russel Simmons and Jeremy Stoppelman, two former PayPal employees and today it’s one of the leading sources of user-generated reviews and ratings for businesses.

How it started is definitely a unique story. Stoppelman caught the flu and struggled to find online recommendations for a local doctor. So, it started as an email-based referral network. Users would e-mail requests for business recommendations to friends, who could reply with their suggestions. The responses would be collected and organized to create a user-generated database of users.

The name “Yelp” was chosen as a combination of “yellow pages” and “help”, and it is a great choice, given it is short, memorable, easy to spell and many were already familiar with yellow pages. However, having a good name wasn’t enough, and the company struggled to scale beyond close family members. The reason was simple – Not many were enthusiastic about answering e-mail referral requests.

However, the founders noticed that the “Real Reviews” feature, which allowed users to write reviews anytime they wanted, without anyone requesting them, was used often. So, in 2005, they rebranded, raised $5m in funding, and the beginning of the growth started. Only 4 years later, in 2009, Google offered to acquire Yelp, but the two parties didn’t reach an agreement. The rumours are that Google offered $500m, while Yahoo offered $1 billion, which Google refused to match.

The company continued its expansion outside of the US and became a public company in 2012. Today, its market cap is ~$2.5 billion and it’s one of the largest crowd-sourced local business review sites. With $262 million of TTM free cash flow the stock is valued at around 10x FCF.

How Yelp Makes Money

As customers share their experiences through reviews, Yelp becomes a gold mine (if data is considered to be gold). This has allowed the company to develop a few different revenue streams over time:

1. Advertising (~95% of all revenue)

2. Transaction-based (~1% of all revenue)

3. Other (~4% of all revenue)

1. Advertising & Business-page products

With all the traffic to their website, Yelp has a range of advertising products, that provide the ability to deliver targeted advertising to large and high-intent audiences. High-intent is the key characteristic. There are two key advertising products:

• CPC Advertising (“Yelp Ads”) – Performance-based ads

• Multi-location Ad products – A range of ad products, designed for multi-location advertisers, including: Showcase Ads, Spotlight Ads and Yelp Audiences. The company also provides a first-party attribution solution (“Yelp Store”) which provides insights into how Yelp Ads drive physical store foot traffic.

In addition, Yelp offers business-related products:

Any business has the ability to create a free account and claim a Yelp page for each of their business locations. Once claimed, it can update its listing information and has the option to purchase certain packages that offer features, such as:

• Removing competitor ads from the business’s page

• Update listing information and select photos to highlight on the page through a slideshow feature

• Verified license indicating that Yelp has verified the business’s trade license and confirmed it as in good standing as of a certain date

• A portfolio that showcases the work or services offered

• Yelp Connect, offering a channel to market new offerings, or communicate business updates to their customers.

• Nearby jobs – providing businesses with the ability to see a dynamic feed of job quote requests in their area of business.

2. Transactions

Yelp facilitates transactions between consumers and businesses, primarily through partner integrations. The largest partner is Grubhub, which allows consumers to place food orders for pickup and delivery through Yelp.

3. Other Revenue

In addition, Yelp is able to monetize via the following products:

Yelp guest manager – A subscription-based suite of front-of-house management tools for restaurants, nightlife and certain other venues. The tools provided include online reservation, a waitlist management solution, as well as seating and server rotation management tools.

Yelp Knowledge – Offering local analytics and insights, through partnerships with companies such as Sprinklr and Chatmeter.

Yelp Fusion – Enables developers to build products that include Yelp’s high-quality content and data. Partners include Apple, which makes the content available through Apple Maps (and Siri), as well as auto manufacturers like Audi AG and BMW. The typical license agreement is multi-year, with rates determined based on type and volume of usage.

Other partnerships such as content licensing and allowing 3^rd party data providers to update and manage business listing information on behalf of businesses.

Key Metrics

There are many metrics that the company discloses. Let’s have a look at them one by one.

Cumulative reviews (in millions)

The growth in reviews is definitely impressive and one of the reasons why individuals go to Yelp. However, I’ll argue that the cumulative reviews isn’t the metric to follow.

There’s a threshold above which, an additional review doesn’t add additional value. One doesn’t feel more comfortable buying a product with 3,500 reviews than buying a product with 3,000 reviews. In addition, having a cumulative metric will always seem impressive, as the number will always go up.

Instead, a better metric would be # of reviews per year. This chart paints a different picture:

Although this could seem worrying, a case can be made that this metric also doesn’t add much value. As humans, a lot of our experiences are repetitive. If you go to a restaurant, and you really like the food, you might give a good review and visit it again. However, when you visit it again, there’s no point in sharing the same review again, unless, of course, your experience was significantly different. Having repetitive experiences would lead to fewer reviews, assuming the # of users is stable.

Active claimed business locations (in millions)

The # of active claimed business locations continues to go up, which is great. Yelp is the place to be for anyone starting a business.

Paying advertising locations (in millions)

However, the number of paying advertising locations hasn’t been growing over the last 4 years.

So, although there are more businesses on the platform, there aren’t more businesses that are paying to advertise. The company benefited a lot from the pandemic and is now experiencing somewhat of a normalization.

Ad clicks & CPC (Cost per click)

Yelp doesn’t report the ad clicks or CPC, but the company does report the change YoY. If 2017 = 100, here’s how both of these metrics have changed over the last 4 years:

Over this time period, the Ad clicks is up 3.7% per year (25% in total), while the CPC is up 5.6% per year (38% in total). However, as of 2019, the number of Ad clicks has been going down, which could indicate that future growth can only be expected by an increase in cost per click. Therefore, the average annual growth would be below 6%, assuming the CPC can grow at the same pace. So, it’s important to note that the advertising revenue isn’t the safest. In difficult times, especially when there’s a recession, companies reduce their marketing spend, as consumers are spending less.

Historical Financial Performance

The company’s revenue has been growing and its gross margin is above 90%, as its direct costs are limited to:

• Website infrastructure (hosting and employee costs for the infrastructure teams)

• 3^rd party advertising fulfillment costs and;

• Credit card processing fees.

It’s operating margin has been growing over time, and now stands at 9%. Part of this is due to economies of scale, and part of it is due to the company’s commitment to be fully remote, as of 2022. That allowed a reduction of office footprint and lower workplace operating costs.

Although the margin has been increasing recently, there’s still a lot of room for improvement and the journey to profitability is on its way.

This is a great example of a company that can utilize economies of scale. The number of employees has been growing at a lower rate than its revenue, leading to higher revenue per employee.

Competition

A crucial part of valuing Yelp is considering its competitive environment. One can argue that it competes with Google Reviews, TripAdvisor, Craigslist, Airbnb, OpenTable, Angi, Resy, and even TikTok and Instagram.

These are not new competitors, so Yelp’s performance is based on the current competitive environment. The question is – Can there be such a change, that would significantly impact Yelp’s business model? Currently, the only risk I see is CPC pressure.

Acquisitions

The company occasionally engaged in acquiring smaller companies with the average purchase price being $50 million. Since becoming public, they’ve used less than $500 million on acquisitions, one of which (Eat24), was sold to Grubhub.

Stock Repurchase Program

As of September 30^th, 2024, the company’s board of directors had authorized the company to repurchase up to $1.95 billion of its common stock. Out of that, $393 million remained available. Given the company’s market cap of $2.5 billion, one might expect that this led to a significant reduction of shares outstanding. Since 2017, the number of shares outstanding is down by only 17%, and the main reason for that is share-based compensation.

One interesting observation is that the company repurchased the least amount of shares during 2020, when the share price was the lowest.

Additional Information

In addition to what has been discussed so far, there are some other factors worth consideration…

Astroturfing

As yelp has been growing, fake reviews, known as “astroturfing” became more frequent. A study from Boston University came to the conclusion that the percentage of fake reviews rose from 6% in 2006, to 20% in 2014. To combat this, Yelp has its own proprietary algorithm, that the New York Attorney General Eric T. Schneiderman said was the most aggressive out of the crowd-sourced websites he looked into. Yelp has been criticized for not disclosing how the filter works although, if revealed, it could contain hints on how to defeat it.

Alleged unfair business practices

There have been allegations that Yelp has manipulated reviews based on participation in its advertising programs. Many business owners have said that Yelp salespeople have offered to remove or suppress negative reviews if they purchase advertising.

Several lawsuits have been filed against Yelp, and each one has been dismissed by a judge before reaching trial.

Business Insider investigation

In November 2020, Business Insider shared a report, that highlighted allegations of a high-pressure sales environment, with claims that sales representatives employed aggressive and sometimes misleading strategies to meet targets. These practices reportedly included pressuring businesses to purchase advertising to mitigate the impact of negative reviews. Additionally, the investigation shed light on ethical concerns within the company, such as heavy drinking and inappropriate behavior among staff. These revelations raised questions about the company's internal ethics and the pressures faced by its employees.

Jeremy Stoppelman’s Reddit AMA

Back in November, 2013, Jeremy Stoppelman decided to do an AMA on Reddit.

Almost all of the questions were negative, such as the following one:

A significant portion of his responses were downvoted, and some of them by a big margin, such as this one:

The following comment was one of the most up-voted:

Of course, this AMA was quite a long time ago, but it’s worth mentioning.

Valuation

Here’s what a bull-case looks like:

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Aehr Test Systems Pops After Earnings

Aehr Test Systems , a manufacturer of test and ‘burn-in’ systems for chipmakers, has substantial exposure to the development of silicon carbide (SiC) chips used in electric vehicles. It’s been SiC that has driven recent growth and future optimism over the past few years, making Aehr more of an EV pure-play than its technology might suggest. Right now, AEHR seems the epitome of the broader trend in the space.

AEHR has now doubled in just three weeks. That includes a 22% gain on Wednesday, after revenue in the fourth quarter of fiscal 2024 (ending May) declined 26% year-over-year. Quite clearly, investors are either trying to skate to where the puck is going, rather than where it’s been — or traders are simply taking yet another stab at risky and volatile plays. AEHR is certainly the latter: shares are still down 22% so far this year, and off more than 50% since early October.

As with the space as a whole, there’s a way to see AEHR as both a potential short — nearly 20% of shares outstanding were sold short before the release — and a solid long. The skeptical response to earnings is that nothing here looks quite that impressive. The outlook for fiscal 2025 of “at least” $70 million in revenue did beat what appears to be a two-analyst consensus estimate of ~$68 million (per Koyfin) — but that outlook also implies just 6%-plus growth on top of a 2% increase in FY24.

In fact, on an organic basis guidance appears to forecast a decline in revenue in FY25. On Wednesday, Aehr announced an acquisition of another test and burn-in player, Incal Technology, which is having some early success in artificial intelligence. On the Q4 call, chief executive officer Gayn Erickson said Incal would contribute about $1 million per month in revenue. With the acquisition not yet closed, ~$10 million of the $70 million is coming from Incal, suggesting organic growth as weak as -10%.

All told, there are three reasons why AEHR rose 20%-plus on Wednesday, and bears would likely dismiss all three. First, the “strong” top-line guidance came from an acquisition; the organic outlook actually looks close to disastrous: at least $60 million from legacy Aehr against consensus of $68 million. (Margin guidance appears a bit soft as well.)

Second, the Incal acquisition almost by definition can’t account for a $111 million increase in Aehr’s market cap on Wednesday; Incal accepted just $21 million for the business1. Notably, that implies a price to revenue multiple under 2x; AEHR’s EV/revenue, pro forma for the deal and even assuming ~$75 million in FY25 revenue, is currently almost 8x2. It’s hard to see Incal accepting such a lowball offer if its technology is truly innovative in such a growing industry, though Aehr did say in its earnings release that the deal opens up a ~$100 million annual opportunity.

There is another piece of news that might have amplified the optimism: Aehr announced a $12.7 million order for its WaferPak™ contactors. That, too, bears would likely dismiss — and even see as further confirmation of the bear case.

The EV Bull Case For Aehr

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• Generative artificial intelligence and other trends are driving up forecasts for U.S. power demand. In theory, that should be a huge positive for utilities.

• However, the market hasn’t reacted much: the major sector ETF has returned barely 11% over the past year.

• The case isn’t as simple as you might think, but there’s a path for multi-year, double-digit returns from the sector.

  ---

Power Demand Will Rise

At the moment, it seems to be a unanimous opinion that U.S. power demand is going to rise. In an April report, Goldman Sachs forecast 2.4% annualized increases in power demand through the end of the decade, up from a 20-year rate of about 0.5%. Data centers are the largest drivers, but not the only one:

source: Goldman Sachs

Utility NextEra Energy , the owner of Florida Power & Light along with a large renewables business, isn’t quite as optimistic. But NextEra still sees 1.6% annualized growth over the next two decades, with a clear step change from recent demand levels:

source: NextEra Energy 2024 Investor Day

Consultancy GridStrategies reviewed filings with the Federal Energy Regulatory Commission (FERC) and calculated that the five-year cumulative load growth forecast across the U.S. has nearly doubled, to 4.7% from 2.6%. When the report was written in December, the firm noted that higher outlook was “likely an underestimate”, given that the more recent the update, the greater the forecasted demand.

Of course, we’ve seen the equity market price in this growth, with names like Eaton , Quanta Services , and nVent Electric soaring (to name just a few). And we’ve seen publicly traded companies — most notably the ‘hyperscalers’ like Amazon and Microsoft — plan for hundreds of billions of dollars in annual data center capex over the next decade. Given that a single data center has electricity usage approximately equal to that of 50,000 homes, that trend alone is going to be material to overall demand.

Certainly, efficiencies within the data center themselves (from liquid cooling, for example) can offset some of this growth. (As more than a few observers and industry participants have noted, AI itself can be used to lower the power requirements it requires.) But given that this isn’t just an AI story — data center growth will continue even for non-AI applications, manufacturing growth should continue to rise, EV penetration will increase, etc. etc. — it does seem like the case for a step change in power demand at this point is relatively solid.

The one caveat, of course, is a recession, which can have significant effects. In 2009, electricity demand dropped 4.2% in the U.S., the biggest fall in at least six decades.

Some Utilities Have Already Roared

That optimism, however, doesn’t seem to be priced into U.S. utility stocks. XLU has rallied sharply off October lows. But taking a longer view, that recovery is not that substantial; even on a total return basis, the ETF is below 2022 highs:

source: Koyfin

Forward earnings multiples haven’t changed materially (with one exception we’ll get to momentarily), and look relatively reasonable on an absolute basis as well:

source: Koyfin

But investors have already priced this thesis into a couple of utility plays. The third- and fourth-best stocks in the S&P 500 year-to-date, behind Nvidia and Super Micro Computer , are Vistra and Constellation Energy . Independent power producer NRG Energy is 13th.

All three are clear AI power plays. Each owns nuclear assets; each can provide the electricity — and importantly, the clean electricity — demanded by the hyperscalers as they build out their AI datacenters.

Here, the market is clearly pricing in increased demand and, likely, higher prices as well. All three stocks have more than doubled over the past year. VST in fact is the best performer in the index over that span, ahead of SMCI and NVDA.

Yet in the rest of the sector, investors seem to have mostly shrugged. The 11.5% gain in XLU over the past twelve months isn’t bad, but it’s not much better than the long-term returns (9.5% annualized for the previous 20 years). By our estimates CEG and VST alone probably account for ~five points of that gain.

How Do Regulated Utilities Benefit?

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• Perion came to the public markets in 2006 as a low-quality business with a questionable business model.

• The company began an effort to move into more stable and more attractive areas of the online advertising market — with some success.

• But the legacy business has been crushed in 2024. Changes by a key partner led full-year guidance to be slashed.

• There may be an opportunity here — but trust is key.

  ---

Right now, shares of adtech play Perion Network are down 61% year-to-date. They trade at about 2.5x the midpoint of 2024 Adjusted EBITDA guidance. That’s the cheapest multiple in the sector, and one of the cheapest in the market. But, historically, it’s not that unusual:

source: Koyfin

Perion has been here before. Long-running concerns about the company’s business model have led investors to see significant risk in its Search segment, and significant question marks elsewhere.

Perion is now the 12th-worst performance in the entire market among companies with a market cap above $300 million. Risks are real. But echoes of the late 2010s are considerable, and equally worth noting: from 2016 lows to 2023 highs, PERI rose nearly 20x.

It’s difficult to pound the table too strongly. The valuation is attractive, but concerns about management, capital allocation, and performance in the business beyond Search all create concern. One interesting question, however, is to what extent those current concerns are being magnified by the company’s missteps in the past.

source: CodeFuel/Perion

A Questionable History

Perion began as a company called IncrediMail, founded in Tel Aviv, Israel, in 1999. Reportedly inspired by a scene from the 1996 film Mission Impossible (one founder would later say that origin story was only “partially true”), IncrediMail became the inventor of the emoticon.

IncrediMail ran on a ‘freemium’ model, and earned revenue by selling advertising and driving search engine queries on Google (now part of Alphabet ) and Yahoo. The company went public in 2006, and in 2011 (after its founders had stepped down) IncrediMail looked to diversify its revenue streams. That year, the company acquired photo sharing platform Smilebox, after which it renamed itself Perion (which derives from the Hebrew word for productivity). In 2012, Perion bought Sweetpacks, a developer of apps and downloadable content, including a messaging service.

There were a couple of problems with the portfolio, however. One was that Perion was operating relatively niche products against Big Tech players. Unsurprisingly, IncrediMail and Smilebox both would lose out to offerings from Google and other ‘Big Tech’ players like Microsoft and Facebook. IncrediMail was shut down in 2020, and Sweetpacks no longer seems to exist. Smilebox remains in business, but is immaterial even for a business with a ~$600 million market capitalization1.

The bigger issue, however, is how Perion monetized its products. The downloaded applications often wreaked havoc on a user’s operating systems, with Perion fond of resetting the default search in a web browser (allowing it to then monetize those searches). A Bloomberg Television segment from 2013 noted that IncrediMail was “virtually impossible to uninstall”2; indeed, the legacy of Sweetpacks seems only to be the endless, still-live, posts from users trying desperately to get it off their computers.

Unsurprisingly, Google was not particularly thrilled about its search business being associated with questionable tactics. The search giant instituted a series of policy changes to eliminate the toolbar installations and default search resets relied on not just by Perion/IncrediMail, but the likes of AVG, Blucora and other major players.

In response, Perion tried to diversify (Google was ~70% of 2012 revenue) by signing a supply agreement with Microsoft’s Bing, and executed a massive reverse merger with Conduit, another developer that too was one of the bigger offenders of the era.

Neither tactic worked. Microsoft instituted basically the same changes, and the Conduit deal was a disaster. By 2015-2016, PERI was (as it is now) one of the cheapest stocks in the market, precisely because investors thought the business was headed for disaster. Until the pandemic arrived, that prediction seemed mostly on point:

source: Koyfin

Perion Goes Upmarket

In response, Perion spent the second half of the 2010s trying to be a better business and, perhaps as importantly, trying to prove to investors that it was a better business. At the end of 2015, the company announced the acquisition of Undertone for $180 million. Undertone developed so-called “high impact” digital advertising (think higher-quality, more dynamic, and often interactive), a notable step-up from Perion’s legacy business.

The deal didn’t actually work out: the rise of programmatic advertising commoditized the industry and disrupted Undertone’s business. In 2017, Perion took an impairment charge of $86 million, nearly half the acquisition price. But the assets acquired did provide a base for Perion to develop a legitimate business beyond search.

More acquisitions followed to augment that base. In 2020, Perion added Content IQ, the developer of a platform for digital publishers. The 2021 purchase of Vidazoo moved Perion into video monetization, and late last year the company purchased Hivestack, a programmatic digital out of home (DOOH) platform.

Even a small, not-particularly-successful deal from 2015, the $13 million purchase of MakeMeReach, turned into a social media marketing business renamed Paragone.ai. The search business re-focused on CodeFuel, serving third parties instead of the previous owned-and-operated apps like IncrediMail. Perion moved into Connected TV (CTV) advertising, and launched an audio ads offering that attracted Pep Boys and Albertsons as customers.

A new chief executive officer, Doron Gerstel, came on board in 2017, and added to the sense that this might be a different Perion. And the effort worked, both in terms of the business and the stock price.

Adjusted EBITDA was $29 million in 2017, and $169 million in 2023. Meanwhile, PERI without exaggeration was one of the best stocks in the market. From 2018 lows to 2021 highs, the stock was this close to being a 20-bagger:

source: Koyfin

Even at the highs, PERI wasn’t that expensive: the EV/EBITDA multiple peaked at about 10x in 2023. But in a adtech space where investors still have worried about competition from Big Tech, not to mention pending privacy changes from Google and Apple , that multiple was not a substantial outlier.

At the very least, it was a multiple that suggested Perion was a real business. That was a departure from the stock’s treatment for most of the 2010s.

Search Bites Again

But, as it turned out, Perion can’t quite escape its history. The company has built a business beyond search, but Microsoft still accounts for 34% of total revenue in 2023; search as a whole drove 46% of revenue.

PERI got thumped after 2024 guidance. But the big plunge came last month. Perion announced preliminary results for Q1, which cited “a decline in Search Advertising activity”. More importantly, adjustments instituted by Microsoft appear to have crushed pricing, and certainly crushed Perion’s outlook:

• Revenue: $860-$880 million at 2/8/24; cut 31% at the midpoint to $590-610 million at 4/8/24

• Adjusted EBITDA: $178-$182 million at 2/8/24; cut 56% (!!) at the midpoint to $78-$82 million

PERI dropped 40% on the release, and hasn’t recovered (the stock has actually lost another ~4% since). Once again, the stock looks incredibly cheap: more than two-thirds of the market cap is in net cash3, and EV/EBITDA at the midpoint of guidance is 2.4x. And, once again, it seems incredibly easy to make the case that the low multiple isn’t enough, because this business is simply too risky to own.

Experience Versus Fresh Eyes

Personally speaking, one of the interesting aspects of the decline is that it highlights the pros, and cons, of having a long history with a stock.

Toward the end of the 2010s, there was a bull case for the stock. Gerstel seemed to be driving improvements in the business, the balance sheet was rock-solid, and the overall digital ad space was growing. But that bull case was a much easier sell to someone who didn’t know the history that well — or at all.

Those who did know that history, myself included, knew Perion as a company whose business model literally had been “distribute apps to older users4 who likely will lack the technical know-how to remove those apps”. Even with a new CEO, and a new business, and seeming downside protection from the cash balance, that perception was nearly impossible to overcome.

Conversely, someone who came to the stock with fresh eyes could, perhaps, see that opportunity more clearly. The risk/reward did seem to favor an investment: Perion might well blow up in a competitive ad space, but if it succeeded the upside was multiples of the stock price at the time. And, of course, Perion did succeed, and to some extent still has: even with the recent plunge, the stock is up 183% since the end of 2016, and +327% from that year’s lows.

There’s obviously an anchoring bias on both sides. Seeing Perion for the first time in 2011 colored the opportunity in 2018. Seeing Perion for the first time in 2018, however, meant seeing a ridiculously cheap headline valuation, with the, shall we say, questionable activities of the past not really relevant to the bull case at the time.

And there was a massive opportunity in the last few years of the 2010s, even for investors who sold too early (or too late). At the same time, a deeper knowledge of the company’s history might well have saved investors here in 2024.

It’s not hard to see in commentary from both investors and executives a rather blasé attitude toward the revenue concentration at Microsoft, and the danger in such a lopsided partnership. (Quite obviously, Perion needs Microsoft far more than Microsoft needs Perion.) But those who had seen the impact of the Google relationship on PERI stock likely had a better sense of the risk. Overall, fresh eyes won but only if they timed it right.

PERI Looking Forward

And after the plunge, this is kind of the same story. PERI again looks ridiculously cheap at less than 3x EV/EBITDA. The downside protection from the cash seems reasonably intact, particularly given management seemed emphatic on the Q1 call that Perion would implement a previously authorized $75 million repurchase effort as soon as possible.

The Search business has taken a huge hit, of course, but there’s still a pretty broad portfolio beyond Search:

source: Perion Q1 2024 presentation

And the sharp cut in guidance itself de-risks the story somewhat at the lower valuation. Simple math dictates that further changes in the Microsoft agreement can’t be that material. Microsoft was 34% of revenue in 2023; if it’s mostly responsible for an expected ~20% decline in total revenue in 2024, its share of total revenue this year is going to be substantially smaller.

In a weird way, Perion’s history shouldn’t really matter anymore: the risk that investors have been dreading for about 15 years has finally played out. We all pretty much knew Search was heading to zero eventually; the debate was really over when that was, how much cash Perion could generate in the meantime, and what it would do with that cash.

And that’s where the debate should be now. Fundamentally it seems to favor Perion. Even if Microsoft revenue goes to zero, PERI is probably trading at a mid- to maybe high-single-digit EV/EBITDA multiple, and at worst mid-teens relative to earnings and normalized free cash flow when backing out net cash.

That’s essentially the 2019 bull case redux: Search is a melting ice cube, but even at a low (or even zero) valuation, Perion as a whole is cheap enough given the strength elsewhere in the business. There’s even a new CEO, as there was five years ago. In August, Gerstel was replaced by Tal Jacobson, an internal promotion. It bears repeating: that 2019 bull case was proven spectacularly correct.

What Exactly Is Going On With Perion?

I personally missed that bull case, because I didn’t quite trust the business. As a result, I’m somewhat cognizant of making the same mistake again. There absolutely is a scenario in which investors are overreacting here. More importantly, it’s not that difficult to look out 14-plus months, to the Q2 2025 report, and see a company that (with some help from easy year-prior comparisons) is returning to growth, and fully focused on building out a broad, unified, adtech platform that can really compete.

Again, the market until recently was treating this like a real business. There are truly intriguing aspects. Management has cited blue-chip customers like Lululemon , Anheuser Busch InBev , and Alberstons, among others. The company’s SORT (Smart Optimization of Responsive Traits) technology aims to drive personalized advertising despite the end of the cookie, and SORT 2.0 is expanding into CTV. Quantitatively and qualitatively (with the caveat that these businesses all have a somewhat “black box” aspect from the outside), it seems like Perion is a significant, legitimate, player in adtech.

But the catch is that, even recognizing that bias, Perion’s Q1 report doesn’t quite add up. The story from management in the preliminary release in April and after Q1 results was that the Microsoft changes begin in the second quarter. This will hit search revenue and, as chief financial officer Maoz Sigron put it on the call, “to a limited extent, a reduction in video activity”.

The problem, however, is that Q1 was a disaster. Perion didn’t give guidance for the quarter, but for the full year (at the midpoint) it projected growth in revenue of 17% and in Adjusted EBITDA of 6%. In Q1, advertising revenue fell 5% year-over-year, driven by video (where Perion has shifted inventory to display); overall Adjusted EBITDA plunged 35%.

Per management, the Microsoft changes didn’t hit the search business in the quarter. Indeed, Search revenue rose 26%. But TAC (traffic acquisition costs) jumped, and margins collapsed — with at least some of the pressure coming ex-Search.

Indeed, it looks like Perion almost certainly would have had to lower its full-year outlook even without the Microsoft changes.

Sigron did say video would bottom after Q2, which likely means the company expected (and expects) a more back-loaded year, but at the very least Perion is playing from behind. And it’s worth noting that normalized EBITDA remains below the ~$80 million guidance for 2024, since that includes a quarter for Search that ended before the Microsoft changes. On a run-rate basis, this is probably closer to a $65-$70 million business at the moment, though to be fair that is still a valuation of about 3x EBITDA.

Trust And The Value Trap/Value Play Debate

There was essentially zero commentary from management after Q1 that explained why the quarter was weak — or even acknowledged that weakness at all. The tone was that the Microsoft changes were a setback, but one that Perion will eventually be able to overcome. That may be true, but if so Q1 was hardly a strong first step in that process.

And the problem is that a stock like PERI at this point boils down to trust in management. The company does have $480 million in gross cash and investments — but no apparent plan to use it, beyond the aforementioned buyback. $200 million-plus comes from equity offerings executed back in 2021; the second in retrospect was a good trade (Perion sold $180 million in shares at $21.50) but remains questionable from a capital allocation standpoint. M&A still seems to be the focus, as has been the case for a decade and a half: Perion last bought back stock in 2009 (it repurchased ~$1 million at March lows), and changed to a firm policy of not paying dividends the following year.

There’s a real sense that the business just isn’t good enough, in terms of operations and in terms of being shareholder-friendly. The ability of Perion to change that perception and regain credibility with investors can drive shareholder returns: Gerstel did exactly that in his six-year stint atop the company. That (along with bottom-line growth, of course) was enough to get PERI’s EV/EBITDA multiple from absurdly cheap to reasonable, and that was a material driver of the 1,800%-plus returns the stock posted in seven years.

History absolutely can repeat here. Simply executing on the buyback would likely put some capital allocation concerns to rest, though a more aggressive policy at this point would be welcomed. (If the company’s own stock isn’t a great investment at under 3x EBITDA, when is it a great investment? And what acquisition can possibly be a better alternative?)

It’s always difficult to jump into these situations in the small- to mid-cap world. Of course, it’s always tempting as well. As PERI shows, the upside can be tremendous if there is a coherent, rational, and realistic strategy for improvement.

That strategy may exist here. But, to be honest, I don’t see it coming out of Q1. That may be the wisdom gained from following PERI for over a decade — or it may be making the same mistake twice.

As of this writing, Vince Martin has no positions in any securities mentioned.

Disclaimer: The information in this newsletter is not and should not be construed as investment advice. Overlooked Alpha is for information, entertainment purposes only. Contributors are not registered financial advisors and do not purport to tell or recommend which securities customers should buy or sell for themselves. We strive to provide accurate analysis but mistakes and errors do occur. No warranty is made to the accuracy, completeness or correctness of the information provided. The information in the publication may become outdated and there is no obligation to update any such information. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Contributors may hold or acquire securities covered in this publication, and may purchase or sell such securities at any time, including security positions that are inconsistent or contrary to positions mentioned in this publication, all without prior notice to any of the subscribers to this publication. Investors should make their own decisions regarding the prospects of any company discussed herein based on such investors’ own review of publicly available information and should not rely on the information contained herein.

• A 36% sell-off following the announcement of the long-awaited merger between Uniti and Windstream creates a huge opportunity — on paper.

• But in practice, this type of bull case has rarely worked in recent years, particularly in the cable/fiber space.

• Uniti’s post-merger strategy flies in the face of current market consensus about the future of fiber and expected returns on capital.

• Yet that consensus was completely different just a few years ago; UNIT is likely the best bet on it being wrong again.

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• We update our deep dive on Perficient from this weekend, after reports the company is considering a sale.

• VeriSign stock has plunged. Given exceptional fundamentals, the sell-off seems like an opportunity.

• If VeriSign can grow registry volume, the stock should be a good investment. But that might be easier said than done.

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A Quick Update On Perficient

We pitched IT consulting firm Perficient in our Sunday deep dive. On Tuesday, Bloomberg reported the company had hired advisers and was considering a possible sale. PRFT jumped more than 8% on the report, and is up almost 14% so far this week.

It is good news that the company is in play. But as we wrote on X/Twitter this week, the timing is somewhat curious. PRFT hit a multi-year low last week, and our argument for the stock was that the market was misreading cyclical weakness as secular or competitive pressure. If that’s the case, and if generative artificial intelligence will eventually prove a tailwind for the industry, this seems like the absolute worst time to sell.

That’s particularly true given how steeply PRFT has declined in recent weeks. The stock closed above $72 on February 12th. In this market, businesses can sell, and have sold, well below multi-year highs (PRFT peaked at ~$150 in November 2021), but taking a price seen three months earlier is exceptionally difficult. The issue is $72 represents a 65% premium to the close the day before the Bloomberg report.

So there are basically two explanations here, which lead in completely different directions. The first is that the Perficient board thinks there’s a possibility of a huge premium to Thursday’s close below $49, because it likely will take that kind of premium for shareholders to approve a sale. (The board has no advantage in the vote, either. Insider ownership is exceptionally thin: barely 2% of shares outstanding across all executives and directors.) Based on where the stock has traded, most active investors who bought the stock this year, let alone before that, believe that PRFT is an $80-plus stock (myself included). It should take that kind of offer for the board to even listen.

The bearish interpretation, however, is that the board does think there’s something going on here beyond cyclical weakness, whether that’s risk from genAI or something else. To be sure, given the pace of corporate strategic movements, the decision to explore a sale (which Bloomberg, emphasized was not guaranteed to happen) was likely made with the stock higher than it traded earlier this week.

Even so, after management has spent multiple quarters arguing that the company’s problems are external and cyclical, it would be an obvious red flag if the board thought it was wise to have a strategic alternatives process when its executives themselves are saying the cycle hasn’t turned yet.

For now, the decision seems logical (and, again, far from binding). As the report correctly noted, there are multiple parties with potential interest, whether strategic buyers or private equity. Rivals are positioning for genAI, and as a result may have reached out informally to gauge Perficient’s interest. Private equity funds still have plenty of capital to put to work. As such, a big premium to the current price absolutely is in play.

But between the chart and the fundamentals, PRFT is a classic case where the clear risk is that there is something the bull case simply isn’t accounting for. That risk does seem magnified just a bit here. The simplest thing for the board to do here would be to wait. It remains to be seen whether they’re being proactive to take advantage of an opportunity, or to avoid a risk. We’re still happy betting on the former.

VeriSign: The Best Business No One Is Talking About (Or Buying)

There is a legitimate case that VeriSign , the registry for .com and .net Internet addresses, is one of the best businesses on U.S. exchanges. Its return on invested capital, per a Koyfin screen, is the highest in the entire market, in part because current assets are negative; suppliers fund the business’s capital needs. VeriSign’s net income margins, on a normalized basis and focusing solely on operating businesses, have few peers. The overall margin structure in 2023 looked like this:

source: VeriSign 10-K

It’s not a coincidence that VRSN was one of the first tech buys from Berkshire Hathaway, back in 2013. Berkshire still owns almost 13% of the company.

Meanwhile, this has been a market in which investors have been rewarded for paying up for the best businesses. And yet, for some time now, VRSN has been a dud:

source: Koyfin

The underperformance is all the more stark given that VeriSign has been aggressively repurchasing shares. While VRSN stock is down almost 14% over the past five years, its market cap has declined more than twice as much.

It’s not as if the business has struggled. Between 2019 and 2023, net income rose at a 7.5% annualized clip, thanks in part to a 500 basis point expansion in net margins. Rather, it’s been the multiple investors are assigning to future earnings that has been the problem:

source: Koyfin

Is VRSN Cheap?

21x earnings perhaps isn’t that cheap. And there is a bit of a catch in using a four-year growth rate.

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The Charles Schwab Pitch

We recommended Charles Schwab a little over a year ago. Silicon Valley Bank had just failed, and SCHW had declined 24%.

Our pitch contained 3,400 words, but in essence could be boiled down to just two: come on. Charles bleeping Schwab was not going bankrupt. Yes, as another wri…

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• Medical device company CONMED looks like one of the more attractive plays in healthcare. The stock trades at 18x forward EPS despite guidance for 20% growth.

• But short interest suggests the opposite, and centers on a key threat to the business from a major rival.

• Management is emphatic that key products can power through, but early commentary suggests CONMED’s leadership may be underestimating its challenge.

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• French fry business Lamb Weston plunged 19% on Thursday, its largest-ever single-day decline.

• The catalyst was a disappointing earnings report, caused by a poorly-executed ERP implementation.

• The bigger issue appears to be structural: industry capacity is on the way, which may exacerbate already slowing demand.

• History says LW is a buy with EV/EBITDA under 10. But investors have to trust their judgment of what this business actually is.

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• Manchester United stock (MANU) has been on a roller coaster ride due to takeover speculation, but the Glazer family's high asking price has left investors in limbo.

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• A ne…

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• Near all-time lows, GoPro stock is more intriguing than some might realise.

• Orion Group Holdings posted a strong quarter which should further strengthen the bull case.

• Chart Industries gained 12% on Wednesday but still isn’t trusted by investors. That’s both the risk and the reward in GTLS.

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Temu and its ‘fast fashion’ counterpart/rival Shein are quickly reshaping the U.S. retail industry…

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• Adjusted for its leasing business, cash and securities, and the value of its stake in Porsche, Volkswagen is trading at a negative enterprise value.

• Obvious drivers of that valuation (weak performance or poor treatment of shareholders) don’t seem to apply.

• There are a variety of concerns, but none justify the current prices in Volkswagen or Porsche.

• Standard ‘sum of the parts’ risks apply, but it’s hard not to be intrigued here.

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Our recommendation of chipmaker Cirrus Logic last month had two pillars. The first was that CRUS was selling off amid concerns about the company’s heavy reliance on Apple , despite little evidence that the relationship had deteriorated. The second was that Cirrus Logic had the opportunity to jumpstart growth in its bus…

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