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Why Constant Contact, Inc. Stock Crashed Today

By Anders Bylund - Jul 24, 2015 at 12:50PM

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Soft third-quarter sales ahead triggered a drastic price correction on this high-flying email marketing expert.

Constant Contact headquarters in Waltham, Mass. Image source: Google Maps.

What: Shares of online marketing tools provider Constant Contact (CTCT.DL) fell as much as 22% in Friday's morning session, setting new 52-week lows in the process. In a second-quarter report filed on Thursday night, the company delivered mixed results but a weak outlook for the third quarter. By 1:45 p.m. Friday, the stock was down 18%.

So what: Second-quarter sales rose 13% year-over-year to land at $91.5 million, just below the Street consensus at $91.8 million. On the bottom line, adjusted earnings increased from $0.22 to $0.29 per diluted share, ahead of analyst targets of $0.22 per share.

Looking ahead, Constant Contact set third-quarter goals below the current Street view on both the top and bottom lines.

Now what: Management also lowered its revenue outlook for the full year, but simply narrowed its earnings guidance for the fiscal year around the midpoint of existing projections.

Notably, a brand-new partnership with web services veteran Web.comkicked off late in the second quarter, with most of that project scheduled for the third quarter. Another alliance with online business platform Endurance International Group also rolled out in May, building business momentum in June and delivering a significant number of new email service customers to Constant Contact.

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

These drivers toward stabilization in the second half really haven't taken effect yet, but management is "cautiously optimistic" about them. Keep in mind that Constant Contact is smaller than either one of its new marketing partners, and hopes to draw strength from the sheer scale of its fresh sales channels.

"Both partnerships will continue to evolve and deepen as we more fully integrate our product suite into our partners' respective product flows and sales pipelines, as well as increase marketing efforts with both companies," said Constant Contact CEO Gail Goodman in an earnings call with analysts. "We believe both partnerships have the potential to generate considerable customer growth and revenue over time."

Constant Contact has doubled its trailing sales and nearly quadrupled free cash flows over the last five years, but share prices only increased by 8%. The stock remains steeply valued at 43 times trailing earnings, but the truly nosebleed valuations of recent years are fading out. If Constant Contact can overcome a slow patch in its revenue growth, it might even grow into these lofty prices over the next couple of years.

Price correction like the one we saw today can only accelerate that process. Constant Contact might not be a no-brainer buy today, but do keep an eye on this company for signs that its marketing partnerships are gaining traction as promised.

Anders Bylund has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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