A Trader’s Value Guide To Ancestry.com

By Hilary Farrell

Online genealogy resource Ancestry.com (ACOM) popped on Wednesday as news came through regarding the company’s alignment with Qatalyst Partners LLC to shop for buyers, hitting a brief high of $26.16 in early market trading on heavy volume. At last check, going into the close Friday, shares were trading at $26.35, up over 5% on the session.

In order to frame an investment strategy, let’s take a look at Ancestry.com’s history, IPO, and recent trading levels.

Recent News and Updates

On May 13, Comcast-owned (CMCSA) and minority owner General Electric’s (GE) NBC Universal terminated Ancestry.com’s show, “Who Do You Think You Are?” along with a succession of other network cancellations. The genealogy documentary series enjoyed three seasons, premiering on NBC on March 5, 2010, and featuring celebrities in a journey through their family lineage. (Fun fact: Lisa Kudrow, best known as Phoebe on “Friends,” was an executive producer.)

Shares subsequently faced pressure the next day, losing over 13% on heavy volume at around four times the stock’s three-month daily average trading hands. In recent trading sessions the stock had a very large short interest, with more than 20% of its float sold short.

Following the cancellation decision, analysts covering the stock the following day seemed unanimous in their positive sentiment. Piper Jaffray reiterated its company Overweight rating, Citi maintained its Buy rating, and Goldman Sachs put out a company update stating that significant growth drivers remain outside of near-term impact:

While the stock is likely to react negatively to this news, we believe that allocating subscriber acquisition spending to other channels like social, search, and mobile may be of greater benefit to subscriber growth long-term. At six times 2013E EV/EBITDA vs. 13 times for the Internet average, we continue to believe the risk/reward in shares of ACOM remains favorable.

BofA Merrill Lynch also provided color:

Since 4Q2010, we have written about the possibility NBC would not renew “WDYTYA?” and are not surprised by Street’s negative reaction to the news. We were, however, surprised by NBC’s decision because Ancestry was effectively paying for the production of the show, giving NBC ~5 million weekly viewers at almost no cost.

Ancestry.com’s Q1earnings announcement and guidance April 25 after market close saw the stock surge 4.4%, closing at $24.44 prior to market close. Shares enjoyed another boost in after-market trading, closing at $27.01. The company announced the acquisition of Archives.com for $100 million, as well as FY Q2 2012 revenue expectations of $115 to $117 million and a forecast of $460 to $470 million in FY 2012 revenue, vs. analyst expectations of FY Q2 2012 revenue reports of $117 million and FY 2012 revenue forecast of $461 million.

Early Days and IPO

Ancestry.com began as Ancestry, Inc. — a publishing company — in 1983, founded by John Sittner. According to its website, the company has been digitizing billions of historical records since 1996. Western Standard Publishing (WSP) purchased Ancestry, Inc., on Jan. 1, 2007, and in July of the same year subsidiary company Infobases founders Paul B. Allen and Dan Taggart bought out WSP’s interest.

Ancestry, Inc., expanded its offerings over the next couple of years, adding Bookcraft (later selling the brand name in April 1999), MyFamily.com, and FamilyHistory.com among others. The company changed its name to The Generations Network in 2006, and then to Ancestry.com in 2009. The company also operates Genealogy.com, Fold3.com, Rootsweb.com, Family Tree Maker, and Footnote.com, among others.

Ancestry.com filed for a $75 million public offering Aug. 3, 2009, entering the financial maze of paperwork with almost one million paying subscribers and over one billion profiles spread across 11 million user-sourced family trees. (For more information, see the company’s SEC filing here.)

2009 was a hot year for IPOs in the Tech space, with buzz-worthy debutantes including Rosetta Stone (RST), SolarWinds (SWI), Bridgepoint Education (BPI), Avago Technologies (AVGO), Changyou (CYOU), Fortinet (FTNT), DigitalGlobe (DGI), A123 Systems (AONE), LogMeIn (LOGM), Emdeon — acquired by Blackstone (BX) in 2011 — and CDC Software, which was suspended in December 2011 by Nasdaq and delisted from the exchange in 2012.

Ancestry.com debuted on the public markets on Nov. 5, 2009, with 7.4 million shares priced at $13.50 per share — a perfect median for its $12.50 to $14.50 expectations. Shares had a 180-day lockup period and selling stockholders accounted for 44% of shares on the market. Morgan Stanley (MS) and BofA Merrill Lynch (BAC) headed up the offering, with BMO Capital Markets, Piper Jaffray (PJC), and Jefferies (JEF) serving as co-managers.

Notably, OpenTable (OPEN) opened May 21, 2009, with a boom; or as TechCrunch astutely put it, “On a day when the Nasdaq is down 2%, OpenTable is up 40 45% from its offering price of $20 (which itself kept moving up from $12 to $14 initially).” At the end of the day, OpenTable closed at $31.89, up 59%, with a market cap of $689 million. The company today has a market cap of around $906 million.

Tech IPO chatter had investor, self-proclaimed “media guy,” and Bloomberg contributing editor Paul Kedrosky nervous at the end of the year, citing Netscape’s flop, Yelp’s (YELP) pre-IPO Google rebuff, and Zynga’s (ZNGA) pre-IPO funding round as the dangers awaiting us in 2010.

Ancestry.com enjoyed nice growth in 2010’s market. Shares appreciated over $14 by the end of the year, and November brought a secondary offering to the market priced at $26 per share. Analyst ratings firms Dougherty, BMO Capital Markets, and Jefferies initiated coverage on the company from December 2009 to March 2012, with Canaccord Genuity initiating in January 2011. The company announced revenues of just under $400 million in 2011.

Shares closed Wednesday at $25.06 at a trading volume of three million, up 10.74% from Tuesday’s market close, and with a 200-day moving average (DMA) of $25.18. Year to date, shares of Ancestry.com were trading up 14.76% heading into Friday’s market close, and were down 1.3% over the past month. The company has a market cap of $1.12 billion.

Actionable Trading Ideas

Bullish:

• If you believe Ancestry.com shares are undervalued at current levels, today’s sell-off may present a long-term opportunity.
• Social media networks and Internet giants Facebook (FB), LinkedIn (LNKD), and Google (GOOG) may enjoy some play — as well as Global X Funds’ Social Media ETF (SOCL) — as rumors continue to circulate and the company moves forward in its search for a buyer.

Bearish:

• If you do not see Ancestry.com’s acquisition strategy as profitable, you might look for other opportunities in the Web and Tech space, such as Web.com (WWWW), XO Group (XOXO), InterActiveCorp (IACI), and FriendFinder Networks (FFN).
• Not feeling the tech market? Take a page out of Warren Buffett’s book and look to blue chips such as Coca-Cola (KO), McDonald’s (MCD), or Pepsi (PEP).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.