The Knot (NASDAQ – KNOT $8.76) had their analyst day in NYC today. (For some reason the event is not being webcast.) It’s a name that I only recently started looking at, but in the last year we’ve been very attracted to Internet-based businesses that focus on meaningful niche markets, like Ancestry.com, or streamline traditional processes – OpenTable, SPS Commerce, and Higher One Holdings are examples.

The Knot is a destination site for weddings.  They are deeply established in their niche and have built many relationships around standards like bridal registry that are meaningful advantages. In addition, the company has taken some steps to broaden their market into adjacent spaces like homemaking (The Nest) and starting a family (The Bump.) I’m really not sure about these names but I’ll let it slide for now.

Some basic stats: Revenues $111M, Gross Margins 77%, EBITDA Margin 11%, Growth ~6%, Balance Sheet $124M cash, no debt, Market Cap $298M, TEV/Revenue 1.6x.

The stock had a great run from 2005 to early 2007 and moved from $5 to $30. Since 2007 the performance has been a mirror image but the stock has started to perform well in the last few months. The company has gone through a period of restructuring and rebuilding the business. Most brokers seem to have price targets in the $9 to $10 range but, as we know, these targets are only lines in the sand.

There’s lots of opportunity for The Knot but the company has been behind the curve and somewhat uninformed regarding the Web. The company launched vendor reviews and rankings in May of this year. The good news is that they launched something like this although it comes some years after these techniques have been mainstream for online companies. They note that they have spent a lot of time to rebuild their back end systems and are now prepared to drive innovation.

The relationship with Macy’s is changing in early 2011 to a more standard arrangement. This has resulted in a big drop in registry commissions from Macy’s which was a major driver for the company. New partners are expanding rapidly, though, and within a year this will cease to be a drag on YoY compares. The potential for online purchases from bridal registries is over $1B today and is a market that The Knot should own. The Knot is in the perfect position to re-engineer the registry process so that brides and guests can see an entire registry and sync guest purchases with the master so that everyone knows what gifts have yet to be purchased. This is a pretty mundane commerce application but one that certainly has value and can help lock in customers.

There is some bad history, however, with The Knot alienating people who sign up for the service because they distribute the contact information broadly and with little restriction. Some reviews of the site tell brides “use the information there but don’t sign up!” We have not had the ability to address this with the company and are not sure if analysts will bring this up today at the meeting. It’s possible that this issue is solved but we still see online comments that suggest people remain leery of the site.

Management and culture at the company may leave something to be desired based on comments from recent employees. This is no Zappos! Communication is very lacking between management and employees at all levels and the company promotes a “sink or swim” style of employee development. It also sounds like the “right sort” of people tend to do better than most. In this case white, preppy females fit well; others, like men or minorities, are not likely to find the environment there as welcoming.

The Knot is trying to build a bigger profile in China which could certainly be a big opportunity. It’s early days, however, and there’s no way to know how material this will be for the company at this point. The company is spending about $2M/year to try and build a business there.

Advertising appears to be growing again and represents the biggest slice of revenue for The Knot. The company has restructured and added staff in direct sales and support to grow this business faster while reducing churn and average customer spend.

Strangely, the company has not purchased any stock despite having an approved stock repurchase agreement in place for several months. They had plenty of opportunity to buy back shares between $7 and $8 for most of the summer.

The shares have an Intrinsic Value of $12 if we assume fairly limited growth but disciplined expansion in margins back to 16% of the next few years. If the company can execute better and drive higher growth rates post-2011, then the shares could have more room to appreciate.

Our overall conclusion is that this is a valuable asset and the current share price represents some value. We prefer names like Ancestry.com as a business but The Knot has lots of room to improve their execution and capitalize on the opportunity in this market. The reason for not falling in love with The Knot is a combination of their so-so execution and a management style and corporate identity we find a bit off-putting.

[Disclosure: The R2 Model Portfolio has a small long position in The Knot.]

Related articles

• The Knot Gets Upgraded (fool.com)

We published a Motorola positioning document and company analysis back in February (available here) that outlined how Motorola might establish some improved momentum and gain a better multiple in the market to drive the stock towards $20.  Even absent a bold strategy, the valuation of the company post-split is likely to be in the $11-12 range.

Our analysis was mostly greeted by a giant yawn of mildly disgusted indifference. Motorola had been disappointing long enough (most would point to the RAZR in 1993 as their last real innovation) to be no longer worth paying attention to. The situation reminds me very much of the time that a company called Sterling Software (trading under the symbol SSW at the time) acquired the TI software business. Back then, my view of the acquired business was that in the next 12 months SSW stock was likely to double as investors learned how much revenue and earnings the acquired business would add. (SSW did indeed go on to double that year but was still a failure for me as a sell-side analyst because I failed to get clients to put it into their portfolios.)

Adding to the difficulty of getting anyone interested has been the lack of a clear point in time when the shares might start to outperform. In fact, the shares have been “dead money” so far this year. But things are perking up with continued success in the Android market and the realization that the split may be a positive catalyst.

To that end, the sale of their wireless network business to Nokia Siemens for $1.2B in cash is a clear positive.  The value is more or less in-line with our $1.8B intrinsic valuation for this business since MOT is retaining the patent portfolio, some receivables and the iDEN business. As described in our note, the Networks business was seen as “the best candidate [business] to eliminate,” and so it comes as some relief that a solution was found. The transaction is expected to be finalized before year-end, paving the way for the complete split of the company at the beginning of 2011.

We are mostly attracted to what will be the mobile computing segment of the company that will include both the Mobile and Home businesses.  We’ve made no secret about our preference for mobile and consumer Internet technology investments (as in “Time to Pull the Trigger“, June 2008) and see the combination of mobile and home-based Internet technology as a sensible way to address the consumer market.  Although the smartphone is the central feature of mobile Internet, consumers wish to take advantage of other networked devices in their home, and even in their cars, to extend the power and richness of their connected world.

The earnings report today demonstrates at least respectable execution which is all the company needs to begin to win investors over again.  In our view, the success of Android is producing a powerful tailwind for the Motorola mobile business that will improve the fundamentals sequentially for the next several quarters.

As the split gets closer we will do our IV analysis for the two companies but fully expect the shares to be in double digits in the next 6 months.  While not spectacular, this is a very attractive return from current levels in a very liquid security.  If the company were to execute well the equity value could easily top $20.

So here we have another stock that looks poised to double in the next 6 to 12 months. Apple is far more sexy (and we own that one too) but based on our IV there is more upside today in MOT.

Our overall IV analysis, as well as that of the individual business segments, is available to R2 subscribers.

[Disclosure: The R2 Model Portfolio has a long position in MOT and so does the author at the time of this writing. Positions are subject to change anytime and without notice. This post should not be considered investment advice.]

Google is in the news again in a not-so-favorable light due to continued scrutiny and actions in Europe. We have written about this a few times (see Related Posts) and we have acknowledged it more as a nuisance so far.

However a recent post over at Taylor Frigon discusses the shifts that occur for large industry players over time and suggests that the “topple rate” for the kings of the hill may be increasing.

In the last few week or so I’ve been thinking about some other long-term and big picture technology company shifts and some of the conclusions made me become incrementally worried about Google, at least in terms of what multiple to apply.

The key exploration that started off my line of thinking was IBM versus Sun Microsystems. IBM has faced some very serious shifts in their business and has managed to deal with them quite effectively although in most cases over a multi-year period.

We were at IBM for the shift into professional services. It was a very hard sell at first. Few, if any customers, felt that IBM could be objective. But IBM brought in senior executives that understood the services business and perhaps most importantly they changed all their employee incentives to drive behavior. In the ensuing 10 years IBM built a huge, top quality services business that also helped them add to their software empire as well.

There were many major changes at IBM over the past 20 years including exiting the PC business and becoming an OEM supplier but the point we are left with regarding IBM is that they understand two things as deeply as any player in the market: technology and the enterprise business. (we will come back to this vis a vis Google and Apple)

What about Sun Microsystems? They famously didn’t make it despite their technology acumen and massive business success in the late-1990′s. We know that Sun didn’t understand software or services at all but they took the further step of deciding that they wouldn’t bother to learn about it either. So Sun soldiered on in a battle where the terrain, weapons and methods of fighting all changed but Sun didn’t. That’s why the story ended the way it did in contrast to IBM.

I’d say the critical problem at Sun was that they only understood technology deeply, and even then it was mostly hardware and server technology. Sun didn’t see things from an enterprise perspective. Nor did they have any consumer expertise. So at a very high level Sun was actually a feature and not a company. It sounds glib but I don’t think it is.

Sure but that’s all ancient history now. What does it have to do with Google?

In looking over the landscape of companies we follow and have in our R2 Model Portfolio company management and culture is a key aspect of our investment process. In fact since it factors directly into the multiple investors should apply to future results it’s perhaps the most important one.

Broadly speaking we’d say that Apple is a company that understands technology, both software and hardware, as well as any other company in the world. However they couple it with a design and consumer focus that is allowing them to gain market share in multiple areas all at the same time. Obviously their overall company execution in terms of margins, delivery, their retail operations has also been top-notch. So Apple deserves a higher-than-average multiple.

I’d be willing to say that Google understands the Internet better than any other company. This includes aspects like Cloud Computing, Open Source and Mobile Internet to be sure. They have exploited this so far with search and advertising. Fortunately for Google this is a massive, rapidly growing and high-margin market.

But what else?

Google does not have a deep appreciation for the enterprise or consumers. The success of something like Gmail or Google Apps has more to do with it being good technology offered for free or near-free rather than any great insight, marketing or design on Google’s part.

Results on the consumer side of their business are decidedly mixed at best. Wave was a dud. Buzz was a fiasco. Nexus One is a proof-of-concept more than anything else and we expect companies like Motorola to make Android a success.

Again Android will succeed based on the fact that Google has delivered a high-quality, open technology platform for free.

Many of you may be saying “duh!” at this point. That’s who Google is! But I’m not sure if investors completely understand that the leadership and culture at Google may not serve them well as they move into new markets and start to compete with companies like Apple and IBM.

To me it argues for a some tempering of long-term growth expectations and the multiple applied to future results. We still “like Google” and rank them high in our coverage in many areas including Cloud Computing, Mobile Internet and even RealVR thanks to Google Earth, Maps and SketchUp.

Related Posts:

Worries on Google International Materialize…

Is Google International Growth in Jeopardy?

Also for people who want to read a full report on Google we published Google: Media Moguls or Technology Gurus in February, 2008. It’s available in the research library for members and also online for a small fee. Click here to purchase.

[Disclosure: The R2 Model Portfolio has a long position in Google at the time of this writing.]

We published a research report that provided a preview of the QuinStreet (QNST-$13.14) IPO and noted that the main problem we saw was the too-high filing range. The mid-point at the time was $18 and didn’t leave much upside to our intrinsic value (IV) estimate of $21.

Subsequently the investment banks (Credit Suisse, Bank of America and JP Morgan) reduced the price to $15 and got the deal done at a more favorable valuation for investors.

It turned out that one fear outlined in the report regarding a concentration in the paid education space came home to roost thanks to some weakness in the shares of market leader Apollo (APOL-58) last Friday. That plus a little general market malaise has the shares now trading close to $13 which is starting to pique our interest.

Even though this offering wasn’t a great success for the company so far it has paved the way for more companies in this space to test the IPO waters.

Reply.com just filed for an IPO and based on the decent but lukewarm response to QuinStreet it may not be an easy one to get done unless the market improves from here.

We haven’t done the research work yet for an IPO preview report on Reply but given the current trading level in QNST we’d expect investors to be fairly price sensitive.

For anyone that missed our QuinStreet IPO Preview report it’s available free to R2 members (who register and are approved on the website) and for a small fee here for those not interested in registering.

In a tough market a recent IPO like QNST could fall to very attractive levels. Based on our analysis and their high profit margins it’s one to keep an eye on.

References:

QuinStreet IPO Check

[Disclosure: None.]

We published a short research note on QuinStreet on Friday based on our initial investigation into the “vertical” online direct marketing space. The company is on the road for an IPO managed by Credit Suisse, Bank of America/Merrill Lynch and JP Morgan. (Interestingly an old hand in the tech IPO space, Frank Quattrone, is back in the game acting a special “IPO advisor” to the company. We like that trend.)

Most investors got an education on this market from companies like BankRate (RATE – acquired by Apax for $571M) and more currently companies like Monster Worldwide (NYSE: MWW $14) and WebMD (NASDAQ: WBMD $39) which have a readership and traffic slice that is far more specific to the domain area than the more general traffic at “horizontal” online marketing locations like Google, Microsoft, Yahoo or AOL.

The marketing spend has been moving online for some time now and is poised to continue given that it still has quite a bit of “catch up” to do in order to reach current viewing levels of online versus offline content. So the space is large and has strong fundamentals. In the S-1 filing the company cites a total market of $149B for direct marketing, of which about 16% is spent online. So the TAM looks good.

However companies like QuinStreet are focused on more of what we would call a considered purchase. That is a decision that will require some thought and investigation. These include high ticket and complex products and services. Things like online education programs, insurance, a medical operation and home remodeling all fall into this category.

For purchases like this content is important. So QuinStreet actually owns a large number of “feeder” sites that are used to attract, qualify and harvest potential purchasers for their clients. QuinStreet has purchased online properties like www.insure.com and many smaller sites. It might not be fair to call the company a roll-up but it is clear that acquisitions (there have been over 100 of them since 2007) will be a major component to the strategy.

QuinStreet gets paid based on success versus general advertising which is based on “impressions” or even clicks. Marketers using QuinStreet only pay for qualified leads, opt-in decisions and other results which are more readily quantifiable in business and financial terms than online branding and traffic generation.

QuinStreet has been growing this business steadily for over a decade. With current revenues around $300M on a run-rate basis and 20% EBITDA margins the business is financially very attractive.

The vertical online direct marketing space hasn’t received the same degree of attention that the broader search and advertising area has but it looks like an attractive niche.

The maturity and profitability of the company would suggest to us that a public-market transaction can happen (unlike FriendFinder Networks which pulled their IPO again) The current pricing range is a bit aggressive given that mid-point is only a few dollars from our estimate of full intrinsic value but in the end the market will decide where the shares should trade.

If this IPO is successful it may help lesser companies like TheStreet.com (NASDAQ: TSCM – $3), WebMediaBrands (NASDAQ: WEBM – $1.13), TechTarget (NASDAQ: TTGT – $5.31) get a little more interest from investors.

At the same time more established companies like WebMD and Monster Worldwide may get some additional credit for having the same or very similar opportunity to receive fees from vendors based on lead generation, opt-in and other “no lose” propositions.

Anyone interest in the research note itself may get it at no charge as a Research 2.0 member but this requires free registration and approval. More information can be found via this link.

[Disclosure: The Research 2.0 model portfolio has a long position in Google. No positions for any of the other companies at the time of this writing.]