Avoid This Unproven Internet Stock

I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer, too. But some growth stories are inevitably better than others. Hence this regular series. My goal? Out the Fakers, elevate the Breakers, and examine the growth stories stuck in between.

Next up: ValueClick (Nasdaq: VCLK). Is this provider of performance-based online advertising growing sustainably enough for your portfolio? Let's get right to the numbers.

Foolish facts

Data current as of April 22.

Like United Online (Nasdaq: UNTD) or perhaps EarthLink (Nasdaq: ELNK), ValueClick is an Internet conglomerate born in the dot-com era. It survives today as a supplier of advertising and affiliate marketing services scotched together with an odd garden of online properties that grow like mangled trees. Its various branches include:

• Pricerunner
• Smarter.com
• Couponmountain.com
• Investopedia.com

To me, ValueClick is like a lighter-weight version of Yahoo! (Nasdaq: YHOO), but with almost as much history. And I'm not the only one who thinks so. Last October, my Foolish colleagues at Motley Fool Big Short added the stock to their short-sale scorecard. Shares of ValueClick have defiantly risen more than 23% since, despite a rash of insider selling in November and December.

Notable sellers included Chief Financial Officer John Pitstick, Secretary Scott Barlow, and Chief Technology Officer Peter Wolfert. Pitstick and Wolfert sold off 26% and 17%, respectively, of their positions. Barlow parted with 9% of his direct holdings.

On balance, these sales might not mean much. Insiders diversify all the time. The difference here is that many of the sales took place within spitting distance of ValueClick's 52-week high of $17.23 on Dec. 9, just one day after Wolfert sold at $16.80 a stub. The stock has since slid back to $15.79 a share -- and that's despite a 10% jump on Feb. 16 after the company soundly beat analyst estimates for fourth-quarter revenue and earnings.

The elements of growth

Source: Capital IQ, a division of Standard & Poor's.

Unfortunately, big revenue and earnings gains have been the exception rather than the rule for ValueClick. Having seen the longer-term trends, I can understand why my colleagues at Big Short have singled out this stock. Let's review:

• Growth investors like me love straight-line accelerating revenue growth leading to accelerating profit growth. We don't have that here. While ValueClick is back to growing revenue again after last year's decline, there's zero evidence of consistent growth.
• Pricing power is also something we like to see. Or, in lieu of that, excellent cost management leading to higher margins. Here's where the story improves. Thanks to aggressive cost cutting, management has found ways to eke out additional profits from an otherwise unpredictable business.
• We also like businesses that collect quickly. ValueClick isn't this type of business, unfortunately. Receivables grew more than 13 times faster than revenue in 2010, reversing two years of good collections. The result? Cash from operations came in under $100 million for the first time since 2005. Not good.
• Finally, ValueClick's managers are using what resources they have to not only manage dilution but also buy back shares. The company has repurchased shares every year since 2006, reducing its shares outstanding by 19% in that time.

Competitor and peer checkup

Source: Capital IQ. Data current as of April 22.

No doubt due partly to prudent cost cutting and extensive share buybacks, ValueClick outperforms both AOL and Rule Breakers recommendation Digital River. Only Google does better among its direct peers.

To be fair, there may be more than cost controls at work at ValueClick. Management last quarter gave revenue guidance that beat analyst estimates. That's good news; but cost controls only go so far. Top-line growth needs to kick in at some point.

Grade: Unsustainable
That it has increasing income is a good sign. Waning cash flow from operations (CFO) isn't. When revenue and profit growth don't flow through to the bottom line, it raises questions about the terms ValueClick is giving advertisers to place and host their banner ads. When CFO declines for three consecutive years, the questions get serious. So while I may not be as ready to short as my colleagues at Big Short are, I'm not willing to take a chance on a company that hasn't proven itself.

Do you agree? Disagree? Let us know what you think about ValueClick's products, strategy, and valuation using the comments box below. You can also ask me to evaluate a favorite growth story by sending me an email, or replying to me on Twitter. In the meantime, keep tabs on ValueClick by adding it to your watchlist for free, personalized stock tracking.