Ziff Davis: Led By Administration Workforce With Sturdy Acquisition Observe File (NASDAQ:ZD)

Thesis spotlight

I like to recommend going lengthy on Ziff Davis (NASDAQ:ZD) ($71.32 as of this writing). It has an honest digital portfolio that permits it to seize a bit of the digital promoting house, which generates money to fund administration’s acquisition technique. The robust observe document of acquisitions set by administration over time provides consolation that this enterprise is led by a smart workforce. I count on it to generate $900 million in adj. EBITDA in FY26, which, based mostly on a 7.2x ahead EBITDA a number of, would give it an fairness worth of $126 per share, which is 78% greater than it’s price now.

Firm overview

ZD is split into two enterprise models: Digital Media, and Cybersecurity and Martech.

Its Digital Media division focuses on the expertise, purchasing, leisure (TSE), and well being and wellness markets, providing content material, instruments, and companies to customers and companies by means of a portfolio of internet properties and apps. Trusted critiques of TSE services and products; information and commentary about their vertical markets; and interactive instruments and cell functions that assist customers handle a variety of well being and wellness wants every day are only a few examples of the content material obtainable. This a part of the enterprise makes most of its cash from click-throughs, commissions on gross sales linked to clicks, and enterprise leads.

Its Cybersecurity and Martech companies provide cloud-based subscription companies like cybersecurity, privateness, and advertising and marketing expertise to each customers and companies. This section’s revenues are primarily derived from buyer subscriptions and utilization charges.

As of 2Q22, Digital Media represents 78% of working income and Cybersecurity and Martech signify 22%. When it comes to geographic publicity, ZD has 85% of its income from the U.S. and 15% from worldwide international locations.

Investments deserves

Portfolio of digital property targets viewers in a big and rising TAM

ZD primarily offers what are often called “efficiency advertising and marketing options,” which faucet into company advert budgets and generate income so long as the leads are transformed into gross sales. ZD’s verticals are high-value markets with a complete of $94 billion in greenback TAM which have been rising at superb charges, starting from the mid-teens to twenty% CAGR from 2017 to 2021. There is no such thing as a doubt that digital promoting will proceed to develop at a fast tempo, eclipsing conventional mediums reminiscent of newspapers and magazines. Nonetheless, the aggressive panorama is way more tough as a result of now we have the walled gardens of Google (GOOGL), Fb (META), and Amazon (AMZN), which collectively management greater than 60% of complete US promoting spend. Because of this, it’s vital for promoting companies to distinguish themselves so as to seize a bit of the pie, and ZD has the property to take action.

ZD’s portfolio of digital property has some very respectable and recognizable manufacturers of their respective verticals. Listed here are some examples:

1. TSE contains PCMag, Mashable, IGN Leisure (IGN), and RetailMeNot.
2. Well being and Wellness contains On a regular basis Well being Group (EHG), What to Anticipate, and BabyCenter

ZD distinguishes itself from different promoting firms by offering content material that informs choices to a particular viewers with a excessive intent to buy one thing through ZD digital properties. Individuals who go to PCMag.com, for instance, are prone to be already excited about buying a PC, as is BabyCenter.com for girls which can be already pregnant. The holy grail of promoting is with the ability to particularly goal the group of shoppers you need to attain.

The benefit of offering one thing that your buyer desperately needs is you could cost the next payment, and the shopper can pay as a result of he actually wants it. Excessive-intent content material attracts massive advertisers as a result of it generates high-quality leads that end in gross sales, permitting the excessive buyer acquisition value (CAC) to be justified. As of 4Q21, ZD’s common quarterly income per advertiser was $130k, or $43k monthly, which is considerably larger than the common promoting spend on Fb. We all know this isn’t a one-time prevalence for ZD because the commercial section has grown at a 20% CAGR between 2018 and 2021 (supply: ZD Core Investor Presentation Aug 2022), largely in keeping with the trade, indicating that they’re sustaining market share. Additionally, ZD’s prospects are likely to spend extra annually, as proven by the truth that they preserve greater than 100% of their internet promoting.

What makes all of this much more superb is that, in contrast to Google, ZD doesn’t have to pay (or pay little or no) for site visitors acquisition prices as a result of it delivers content material on owned and operated properties. In an offline enterprise context, that is analogous to operating a meals retailer however with out the necessity to pay lease. Which means that revenue margins are considerably larger as a result of prices are considerably decrease (for instance, Google’s TAC is 16% of income as of FY21).

ZD’s Martech and Cybersecurity divisions (which account for a smaller portion of ZD’s income) are largely subscription fashions for companies reminiscent of search engine optimization optimization, cybersecurity, and VPN companies. I will not go into element as a result of my views on this matter are pretty according to consensus. Except for the truth that the top markets are rising by double digits, I additionally like this division due to the recurring subscription-based income it brings in for the corporate.

Sturdy observe document of conducting worth accretive acquisition to increase into strategic adjacencies

ZD’s technique for progress is to amass, personal, and function digital properties with established audiences so as to promote or lease promoting house to companies (as described above), after which to repeat this course of in adjoining markets.

ZD’s acquisition technique is to amass, personal, and function digital properties with engaged audiences with the intention of promoting or leasing promoting house to companies (as described above). ZD CEO Vivek Shah said in the course of the September 2021 analyst day that ZD is primarily a purchaser and operator of Digital Media and Web Companies. The core tenet is to amass property in growing markets on the lower-middle market degree with a concentrate on maximizing free money stream. The emphasis on FCF is comprehensible, nevertheless it doesn’t suggest that ZD ought to solely purchase firms that generate money stream. In some instances, the goal asset might have a really worthwhile core enterprise unit that’s obscured by different loss-making segments. On this case, ZD may purchase the asset to develop the worthwhile section whereas slicing the cash-burning segments.

ZD is usually the client of selection for a lot of sellers as a result of its deal sponsors have loads of expertise (they’ve labored in the identical vertical and with the goal for years) and experience, their decision-making course of is fast, they usually have a repute for being decisive. Primarily based on ZD’s acquisition historical past, administration has a confirmed observe document of buying firms, decreasing unprofitable elements, and reinvesting in worthwhile segments. ZD sometimes finds property for 8 to 10 occasions pre-synergies EBITDA and has elevated EBITDA margins by 60% to 100% (supply: DA Davidson FinTech and Vertical Options Convention). The quantity appears excessive, however it’s doable that since these companies are small (decrease center market with $10–$15 million in income), there is not a lot funding wanted to get synergies and develop the enterprise that was purchased.

ZD’s robust acquisition technique additionally permits them to increase into adjoining verticals if alternatives come up. That is very true for its subscription enterprise, the place it buys different firms to achieve extra customers and companies.

IGN’s acquisition of Humble Bundle is an instance of this. Humble Bundle is a B&M retailer that sells video video games at bundle costs for indie video games, at a value decided by the shopper, with a portion of the value paid going to charities, nevertheless it has content material discovery points, which IGN solves. This acquisition successfully expands IGN’s attain into the $14 billion indie gaming market (September ’21 Analyst Day). Except for this synergy, IGN has additionally launched subscription companies so as to enhance monetization.

Valuation

Value goal

My mannequin suggests a value goal of ~$127 or ~78% upside in FY25 from immediately’s share value of $71.32. That is based mostly on the idea that income progress will return to the historic price of 17% in FY24e and that the ahead EV/EBITDA a number of will probably be 7.2x in FY25e.

For FY22e, I used the mid-point of administration steerage throughout 2Q22, which was $1.42 billion for income and $513 million for adjusted EBITDA. Shifting ahead from FY22e to FY26e, I assumed income may proceed to develop at trade ranges identical to it did prior to now, however with a gradual restoration from FY22e to 17% in FY24e.

As for valuation, ZD at the moment trades at 7.2x ahead EBITDA, about 20% decrease than its 10-year common of 8.9x. I consider this 20% is warranted given the macro atmosphere. Therefore, I assumed ZD would proceed buying and selling at this valuation in FY25e.

Dangers

Promoting income competitors

Regardless of having a couple of respected manufacturers beneath its belt and carving out a distinct segment for itself within the huge world of digital promoting, ZD is just not an enormous participant that has created a considerable moat across the verticals it operates in. FB, GOOGL, and AMZN will enter the market and take market share whatever the dimension of their stability sheets.

Mis-execution of acquisition

It is a downside shared by all serial acquirers; it is not uncommon for administration to overestimate value synergies and overpay in consequence. Even when the deal is nicely thought out and can add worth in the long term, the market notion of it might be “administration overpaid,” sending the inventory down. We noticed this occur only a few days in the past when Adobe (ADBE) acquired Figma, inflicting the inventory to plummet upon the announcement.

Conclusion

To conclude, I consider ZD is price ~78% greater than its worth immediately ($71.32 as of writing). Though there will probably be a slight slowdown in progress in FY22e (based mostly on what administration says), I believe ZD can proceed to develop on the identical price because the trade as soon as the macro atmosphere improves. It’s because ZD has executed this prior to now.