Blackboard: Enticing Math, but Fuzzy

Forget about the monkey wrench in the engine, or the old linseed-oil-in-the-gas-tank trick. If you want to really mess up a company, a good way to do it is to persuade it to acquire another. It's also a good way to mess up the numbers so much that even seasoned investors will not know what to make of them.

Fortunately, for shareholders of Motley Fool Hidden Gems pick Blackboard (Nasdaq: BBBB  ) -- and I'm one of them -- the acquisition of one-time competitor WebCT seems to be progressing smoothly enough, although moving the porker through the python makes for some unsightly bulges right now.

For the second quarter of 2006, revenues increased nearly 32%, but earnings dropped so far that it's really unfair to even call them earnings, coming as they did with that little negative sign in front, the one that stands for "bummer." Still, the $0.23-per-share loss doesn't seem to have scared off the Street. Neither did the guidance for a Q3 net loss of $0.18 to $0.19 per share, slightly larger than analyst estimates. Perhaps it's the sanguine revenue forecasts of $48.3 million to $49.3 million, which tops Street estimates, as did the full-year revenue guidance of $178 million to $180 million.

My only problem with Blackboard is that I have trouble coming up with a reasonable valuation for the firm, other than "more than it costs now, I think." With so many non-cash charges, integration costs, capital-spending needs, moving-target margin norms (because of the WebCT acquisition) and other obfuscating data, it's tough to get a bead on future cash flows, and no matter what I come up with, I'm pretty sure it's wrong.

So I end up looking at other imperfect valuation means, like enterprise value-to-revenue (EV/R) ratios -- akin to price-to-sales -- for similar companies. (And again, Blackboard's lack of competition has me grabbing "similar" companies that are none too similar.) By comparison with, say, Red Hat (Nasdaq: RHAT  ) , with an EV/R of 12.7, or Adobe (NYSE: ADBE  ) , with its 7.3, Blackboard's 5.8 looks cheap. But compared with peer eCollege.com's (Nasdaq: ECLG  ) 4.1 or Symantec's (Nasdaq: SYMC  ) EV/R of 3.3, Blackboard looks downright pricey.

Of course, no one out there thinks Microsoft (Nasdaq: MSFT  ) is about to drive a stake through Blackboard's heart with its next OS (as many think of Symantec, which has to compete with security applications in Windows). And speaking of Mr. Softy, its EV/R runs at about 4.8, which is interesting, because when I ponder Blackboard's future, it's Microsoft that comes to mind most often.

I'm not going to try to tell you that Blackboard is the next Microsoft. I think its opportunities are far fewer. But I will suggest that its competitive position (a rock-solid lead in the education-services market) makes it a bit like the Redmond dynamo. And if its horizons aren't nearly as broad, to my mind, its mindshare is at least much better.

After all, you don't see people out there singing the praises of Windows and threatening to bust up the cafeteria if anyone takes away their PowerPoint, but I have heard such sentiments from high school teachers and college professors who use Blackboard's products. That suggests to me that the company has a long, prosperous path ahead of it as schools of all kinds migrate their management to its online solutions.

A free trial to Hidden Gemswill let you find out why Blackboard's stock is up more than 52% since it was first recommended in June 2005.

At the time of publication, Seth Jayson had shares of Blackboard and Microsoft but no positions in any other company mentioned. View his stock holdings and Fool profile here. Microsoft and Symantec are Motley Fool Inside Value recommendations. Fool rules are here.


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