SeekingAlpha the Stock publication, just published a pretty scathing review of Rightside, (NASDAQ:NAME) the spin off of Demand Media, in a story entitled “Rightside is Its Trending on the Wrongside.”
The story cites some publications in the domain industry including TheDomains.com Domainincite.com and Circleid.com
The story comcludes comparing the company on the Registrar level to Tucows the registrars enom.com and name.com have no value and concloudes that the stock has at least 37% downside.
Share of Rightside closed at $11.71 on Friday on extremely light volume of just over 25,000 shares and has a market cap of $215 million. It has a 52 week high of $17
Here are some of the highlights of a pretty long story, so you should go check it out.:
- The company is relying on gTLD growth initiative that might not pan out.
- Based on recent purchase multiples, Rightside’s gTLDs are worth around $60mm.
- Rightside has reported two straight quarters of negative EBITDA.
- Aftermarket services revenue will continue to decline. The existing registrar business has no shareholder value.
- There is at least 30% downside in this stock as the aftermarket services revenue erodes.
VeriSign has about ~60% margin and trades at 11x EBITDA. Registries are a natural monopoly and can be highly profitable.
However, it withdrew ~$6mm of its applications for gTLD and the balance sheet as of 6/30 shows gTLD assets of $23.3mm.
Rightside has invested in the gTLDs such as .Rocks, .Immobilien, .Attorney, and .Ninja.
Rightside will operate around 30 of them. Rightside will have that “monopoly” over the registry.
Rightside has partnerships with companies like Donuts to distribute over 500 other gTLDs (there are currently only 255 gTLDs online right now and more will be coming online).
Tucows, a registrar, trades around 11x EBITDA also. However, it only generates 6% EBITDA margins. As mentioned above, the registrars generate low EBITDA margins.
Whether the company is a registry or a registrar, the valuation of the companies are roughly 11x EBITDA.
The Equity Story – gTLDs
As mentioned above, Rightside owns the following gTLDs:
ACTOR .AIRFORCE .ARMY .BAR .CAM .DANCE .DEMOCRAT .ENGINEER .FISHING .GAY .GIVES .GREEN .IMMOBILIEN .KAUFEN .MAP .MODA .MOM .MOTO .NAVY .NINJA .REHAB . REPUBLICAN .PUB .RIP .SOCIAL .WOW (Source: CircleID)
The benefit of being a registry of these domains as mentioned above is to earn an EBITDA margin of ~60% (VeriSign’s EBITDA margin) instead of registrar EBITDA margin of ~5-6% like Tucows. The registrar relies on value-added services to generate EBITDA margin.
Rightside has about ~$23mm in total investments in gTLDs (Source: 10-Q). It will operate around 30 gTLDs. According to Domain Incite, Donuts paid about ~$2mm per gTLD. So you can imply ~$60mm value on the 30 gTLDs Rightside will operate. This is in the ball-park that Wall Street Analysts have valued them at.
Tucows is valued at 1.1x revenue. Thus, it might seem conservative if we applied a 1x revenue multiple to the $182mm to determine that the registrar business is worth $182mm. Tack on the $77mm of cash and $60mm of gTLD you get a market cap of $319mm, implying $17.34 per share, close to 50% upside.
If Rightside and its gTLD initiative has big success potential, I question the fact that it withdrew its applications.
Why would Rightside withdraw gTLDs and get its cash back if this was such a successful initiative? As stated in the latest 10-Q:
The net gain related to the withdrawals of our interest in certain gTLD applications was $0.9 million for the three months ended June 30, 2014, and $5.7 million for the six months ended June 30, 2014. For the three and six month periods ended June 30, 2013, the net gain related to the withdrawals of our interest in certain gTLD applications was $1.2 million.
The company’s market cap is around ~$218mm at $11.85 per share. It will report negative EBITDA for 2014. Fortunately, ~$77mm of the market cap is cash, excluding the Term Loan. However, the core registrar business has no shareholder value. As exhibited in prior years, the company has not successfully run a registrar as it was not even gross margin breakeven
The aftermarket services revenue will not be re-occurring.
Where will the company find cash flow? In addition, the company has to pay ~$4.7mm of cash amortization and interest on the $30mm Term Loan.
Let’s go back to Equity Case. I am making the case that the registrar business actually has no value.
The registrar business runs at a gross loss, and the aftermarket services revenue was the only reason why it generated positive EBITDA historically.
Tucows at least generated 5-6% EBITDA margins.
Rightside has operated at negative EBITDA for two quarters and says it will break even for Q4.
There is no value in this registrar business.
However, I’ll give Rightside credit of $60mm for the gTLDs it owns.
If we assume no value for the registrar, $60mm (gTLDs) + $77mm cash = $137mm equity value, implying $7.44 per share.
Therefore, there is 37% downside in this stock.
This is giving full credit to Rightside’s gTLDs. Here is the list again: .ACTOR .AIRFORCE .ARMY .BAR .CAM .DANCE .DEMOCRAT .ENGINEER .FISHING .GAY .GIVES .GREEN .IMMOBILIEN .KAUFEN .MAP .MODA .MOM .MOTO .NAVY .NINJA .REHAB . REPUBLICAN .PUB .RIP .SOCIAL .WOW
How many domains would be registered for *.Airforce, *.Army, *.Democrat, *.Gives, *.immobilien, *.Kaufen? Maybe *.Give I can see people registering but with an additional “s”?
There may be further downside if the valuation of the gTLDs is lower.””
Mike, Rightside doesn’t “own” .gay – they are just one of 4 applicants. The Circle ID article just lists their applications.
I didn’t say they did, Seeking Alpha said they did
Now, please remind, what is the contingency plan of ICANN for those TLDs that appear at technical default? The time will come and we shall see one. Domain investors should provision for this.
it seems they are confused between “registry” and “registrar”. At least that is how I interpreted the parts you quoted.
Here is why Rightside will drop at least 25% in value.. Customer Service Sucks, there back end domain management tools suck and how they treat customs will be the real reason they get crushed. From experience, try getting over 10 auth codes send? Nope, request it and they wont do it. Its the only large registrar I know that doesnt and wont provide you with bulk auth codes. Then when you have to do it individually is takes 6 steps per domain. Then if you manage to get them to send you more then 10 in bulk, they come in wrong and wont resent them. They blame is on google… I am looking a shorting them mainly for this reason as I never had a worst experience from a public and large company like Rightside. When the fundamentals are wrong, its an uphill battle not matter how good your assets.
It’s probably worth noting that SeekingAlpha is a UGC site, so this is a lot less like “Wall Street Journal publishes scathing review of Rightside” or “Goldman Sachs analyst publishes scathing review of Rightside”, and a lot more like “My cousin Joe, whose qualifications include the ability to complete a free registration form on SeekingAlpha.com, publishes scathing review of Rightside”.
Matt
Except if you read the article its not just an “opinion” its a piece that’s pretty detailed that basis its opinion on the financials of other registrars and Verisign
Article looks to be panning out, the stock hit a new low today of $8.01 down 7.10%.