Throw This Stock Away

The house rules are simple in this weekly column.

  • I bash a stock that I think is heading lower.
  • I offset the sting by recommending three stocks as portfolio replacements.

Who gets tossed out this week? Come on down, Active Network (NYSE: ACTV  ) .

Old McDonald had a farm
After watching a few scorching dot-com IPOs mesmerize investors in recent days, yesterday's debut of Active Network brought out the boo birds.

Underwriters priced the Web-based provider of event registrations at $15, below their initial range of $16 to $18. Institutional clients didn't want Active Network in the high teens, and neither did yesterday's buyers in the open market. The stock may have traded as high as $17.11 with an hour left to go in the trading day, but Active Network closed all the way down to $15.90.

Active Network seems to have many of the winning ingredients found in some of the market's dot-com darlings. It's a leader in an interactive niche. It's growing. It's popular. It's a cloud-computing play!

Unfortunately, it also comes saddled with many of the shortcomings that investors are steering clear of these days:

  • Growth is decelerating.
  • Losses continue to mount.
  • The climate is ripe for a disruptor.

Let's go over what Active Network does. The company's ActiveWorks platform allows organizers the ability to manage registrations for activities and events. It's not just about lining up participants for industry conventions or fishing tournaments. ActiveWorks lets organizers promote events and engage registrants along the way.

There were 47,300 organizations securing 70.2 million registrations through Active Network last year. Revenue grew 44% in 2009 but managed a mere 15% top-line advance to $279.6 million last year. Revenue grew at the same 15% clip during the first quarter of this year.

The more problematic metric here is the red ink. Active Network has accumulated a deficit of $266.5 million since 1998, losing more than $55 million in each of the past three years.

Most companies would wait until they're profitable -- or at least close to breaking even -- before going public. Active Network going this route seems desperate.

There are nearly 53 million shares outstanding after yesterday's offering, tagging Active Network with a market cap of more than $840 million. This may represent an attractive top-line multiple, but it's richly overpriced when one considers the history of steep losses and the slow growth.

Good news
As I do every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting the heave-ho. Let's go over the three fill-ins.

  • Google (Nasdaq: GOOG  ) : There are several companies that I can easily see invading Active Network's turf. Facebook, obviously, is already Ground Zero for organizing events. It's a free tool for engagement, promotion, and tracking attendees. It doesn't have the payment-tracking guts of ActiveWorks, but at least Facebook isn't taking a slice out of every registration. Amazon.com (Nasdaq: AMZN  ) and Rackspace (NYSE: RAX  ) are two more to watch given their cloud-hosting prowess. However, Google is the best positioned company outside of perhaps Facebook to offer ActiveWorks to offer an ad-supported solution. It would also be a great way to take its Google Checkout business to the next level.
  • IAC (Nasdaq: IACI  ) : As the company behind Evite.com, it would be hard to keep Barry Diller's collection of well-trafficked web properties off this list. More than 25,000 invitations are sent through Evite every hour. There are 22 million registered users. It's true that Evite is a consumer-centric lightweight. It's no match to ActiveWorks for serious event and activity management. However, IAC's attractively priced for a portfolio that includes Ask.com, Citysearch, and Match.com.
  • Under Armour (NYSE: UA  ) : Since Active Network specializes mostly in outdoor athletic events let's go with the maker of the popular sweat-shaking apparel as the third replacement. Under Armour is growing quickly. Revenue soared 36% during the first quarter, with earnings growing even faster. Investors were concerned about a spike in inventory, but Under Armour's healthy margins don't seem to signal a material problem there. Analysts see revenue climbing 31% this year and 20% next year, with profit growth essentially following suit.

Prove me wrong, Active Network. I would love to register for a crow-eating contest.

The Motley Fool owns shares of Google and Under Armour. Motley Fool newsletter services have recommended buying shares of Google, Under Armour, Amazon.com, and Rackspace Hosting. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Longtime Fool contributor Rick Munarriz doesn't mind taking out the garbage every so often. He does not own any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


Read/Post Comments (2) | Recommend This Article (8)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 26, 2011, at 5:53 PM, anonymous19 wrote:

    Evite is not owned by IAC. It's owned by Liberty Media.

  • Report this Comment On June 02, 2011, at 6:15 AM, rsinj wrote:

    1. As filings show, Disney owns quite a chunk of ACTV and sold about 25% of it in the IPO - my view - buy Disney instead.

    2. As a marathon runner, I've used active.com for probably the past 10 years for many race registrations. Initially, it was a great convenience doing the online registration. The couple dollar fee they added on for that convenience was reasonable. However, for a fall marathon I recently registered for, they were charging $6 - that is simply ridiculous. When the "convenience fee" of an online registration is pushing 10% of the cost of the event, things have gone too far. It took me 10 additional minutes to print out the event's PDF registration form, fill it out by hand, put in an envelope and a postage stamp.

    3. This company is nowhere near profitability. There was a time when investment firms would not take a company public unless there were four consecutive quarters of profitability. I worked at one of those companies back in the '80s. We had three profitable quarters and then posted a small loss - they made us wait another year before going public. I suppose if that mindset were taken now, the markets wouldn't be as much of a casino as it has become.

    I agree with the author - look the other way. There is nothing here from an investment perspective and a year or two from now folks will be looking at a $2 stock.

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