Will WebMD Health Corp's Growth Accelerate in the Coming Quarters?

WebMD soared higher on Monday after updated guidance, but based on its user growth, its bullish outlook may only get better.

Apr 17, 2014 at 12:30PM

WebMD (NASDAQ:WBMD) saw a double-digit rally on Monday after the company announced a first-quarter update, showing that fundamental growth was on the high end of prior guidance. Over the last year, WebMD has been a great comeback story, having finally figured out how to monetize its user base successfully. Yet, compared to other companies that generate revenue through advertising like Zillow (NASDAQ:ZG) and Yelp (NYSE:YELP), its growth has been rather conservative. However, in looking at its site traffic, investors should feel confident that WebMD has more room to improve.

The ups and downs of WebMD
In late 2012, WebMD was at the bottom of a steep stock decline -- it fell from over $55 to under $15 in 16 months -- having seen revenue peak and margins decline. Since then, the company has thrived, offering new products, making its platform more user- and business-friendly, and driving significant volume growth.

Specifically, its large stock gains on Monday were caused by guidance for its upcoming first-quarter report. The company announced that monetization of advertisers and sponsorships are performing better than expected. As a result, revenue and EBITDA year-over-year growth will be on the high end of guidance at 18% and 43%, respectively, while its profit margin will finish around 4%.

Is growth preparing to accelerate?
Clearly, WebMD's growth is impressive, especially for a company that appeared to be in a downward spiral in the year prior. However, in the midst of its turnaround, is it possible that growth could accelerate in the near future?

Strangely, to answer that question, we turn to real estate marketplace Zillow and business review company Yelp. While all three operate in different segments, each creates revenue from advertising and then from partners of sorts. But, most importantly, all of this revenue is dependent on site traffic and its growth.

For example, WebMD, Zillow, and Yelp all have a comparable number of monthly active users. However, in Zillow's most recent quarter, its monthly users rose 57%, but its revenue increased nearly 70%. Yelp's monthly users increased just 39%, but its revenue soared 72% in the same period. Now, in WebMD's updated guidance, the company said its unique users grew 32%, yet its revenue increased only 18%. In other words, WebMD's visitor growth was near Yelp's, which is a stock that no one has ever accused of being cheap.

Therefore, WebMD was the only company of the three whose revenue growth did not outpace unique users. This is important for current or prospective investors because, in the case of most Internet-based companies or those that create revenue from advertising, revenue will typically outpace user growth as a company offers new revenue-creating products. Hence, this fact, combined with WebMD's strong visitor growth, should make investors confident that growth is not only sustainable, but that it could accelerate.

Final thoughts
WebMD is a unique service, providing medical knowledge, information, and a service that is irreplaceable to various companies, medical professionals, and consumers. Yet, because of its tough stretch in 2012 and its large stock losses, the company remains cheap today.

Currently, WebMD trades at just 3.3 times sales and 32 times forward earnings, which is very cheap for a dot-com stock. Zillow trades at 17 times sales and is nowhere near profitable, and Yelp is almost exactly the same, trading at 19 times sales with no profitability in sight.

Therefore, WebMD might not be the most popular pick of dot-com companies -- it doesn't have the explosive year-over-year growth -- but from a valuation perspective, WebMD looks great, and it's very possible that growth will continue to accelerate.

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Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Yelp. It recommends and owns shares of Zillow. 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.

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