Dueling Fools: The Knot Bull

If you've ever had to pay for a wedding, as my wife and I did, then you know exactly why analysts peg the value of the industry at $72 billion annually.

A decade ago, when we were married on a secluded mountain golf course in Southern California, the cost of arranging flowers, baking a wedding cake, hosting 170 guests, and crossing the ocean to Hawaii for our honeymoon was in the tens of thousands of dollars. Today's couples can't have it much cheaper.

Everyone is getting hitched ...
But that hasn't stopped them from trying to save a few bucks. Millions of them are online, usually at The Knot (Nasdaq: KNOT  ) . I'll let bl400, an All-Star in our Motley Fool CAPS investor intelligence database, explain why:

My fiance found this site and it's been a very helpful resource to her. You can organize and plan your wedding on their site, locate specific vendors (tuxedo rentals, bakeries, reception halls, etc), and create a web page to give info about your wedding. You can also create an online guest list with an RSVP feature.

There are other sites catering to the engaged, of course. NBC Universal's iVillage comes to mind. But it's The Knot that's growing like a conga line after the first dance. First-quarter revenue was up 43%. Free cash flow, meanwhile, more than quadrupled from last year's Q1.

... while The Knot gets left at the altar
Investors, however, were expecting more, and shares of The Knot are down 16% since the earnings announcement. Talk about being left at the altar.

Yet CAPS investors remain faithful. Of those who have rated the stock since The Knot's disappointing earnings report, only one says it will underperform. Others say the fall is a buying opportunity.

Seeing as I'm the guy who nominated The Knot as the best e-commerce stock for 2007, I'm inclined to side with the bulls.

Don't get me wrong. This isn't some Tammy Wynette stand-by-my-stock routine. I think The Knot is genuinely undervalued given current market conditions.

Something in the champagne
Rewind to 2006 with me. NBC Universal paid 6.3 times trailing revenue, or $600 million, for iVillage and its 14 million unique visitors.

Back then, company spokespeople were brimming with optimism about the deal. Executives were predicting 20% annual growth in NBC's digital business thanks to the addition of iVillage's properties. Sweet.

Now, take a look at some of the key statistics for The Knot now versus iVillage then:

Metric

The Knot

iVillage

Trailing revenue*

$79.0

$95.3

3-year revenue CAGR

27.8%

18.7%

Gross margin

79.2%

64.4%

EBITDA margin

22.8%

14.4%

Net margin

29.6%

8.1%

Source: Capital IQ, a division of Standard & Poor's.
*Numbers in millions.

Though similarly sized, The Knot today is growing faster and earning more efficiently on its revenue than iVillage was. Surely that demands a premium of some sort? If so, it's hardly apparent in today's stock price. The Knot trades for roughly 7.6 times its trailing revenue.

Oops! There go the privates
By my math, that makes The Knot a bargain. Consider Google's (Nasdaq: GOOG  ) bid for DoubleClick. Big Goo paid $15.50 for every dollar of DoubleClick sales. Applying the same multiple to The Knot makes it worth more than $1.2 billion.

Yes, I know DoubleClick and The Knot are different businesses. The comparison works here because there's a market hunger for digital property -- think GooTube -- and e-commerce enablers -- think DoubleClick or, better yet, aQuantive (Nasdaq: AQNT  ) .

The Knot, interestingly, is both. First there's the site, which can draw browsers for hours at a time, making it a prized property for advertisers. Then there's the registry business, which got a boost from last year's acquisition of WeddingChannel and which continues to draw customers thanks to an e-commerce deal with Federated Department Stores (NYSE: FD  ) .

Give your portfolio a taste of wedded bliss
There's really no telling if The Knot will attract the private equity crowd or would-be digital Trumps like Google, Microsoft (Nasdaq: MSFT  ) , or Yahoo! (Nasdaq: YHOO  ) .

What we do know is that couples prefer to say "I love you" with their wallets. For these happy hopefuls, The Knot is there, helping them spend their way to wedded bliss. Can you really think of a better business than that? I can't.

Wait! You're not done with this Duel. Go back and read the other arguments, then vote for a winner.

The Knot and aQuantive are Motley Fool Rule Breakers picks. Six of the stocks in the portfolio have at least doubled, including aQuantive. Want to find out the names of the other five? Click here to test-drive Rule Breakers free for 30 days. There's no obligation to subscribe.

Microsoft is an Inside Value pick. Yahoo! is a Stock Advisor recommendation.

Fool contributor Tim Beyers, who is ranked 6,440 out of more than 29,000 in CAPS, is a sucker for growth stocks and a regular contributor to Rule Breakers. Tim owned shares of aQuantive at the time of publication. Tim's portfolio holdings can be found at his Fool profile. His thoughts on growth stocks, Foolishness, and investing in general may be found in his blog. The Motley Fool's disclosure policy tied the knot with the Fool's trading guidelines almost 15 years ago. The happy couple still enjoy time with their nine investing newsletters.


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