Sunday, May 28, 2006

WebSideStory is Still a Good Story

Shares of Web Side Story (WSSI) are down about 9% since we initiated coverage on the stock at $15.74. We got an email the other day asking us if we were still fans of the name. The answer remains yes: the WebSideStory will end on a happy note. In case you missed that report from 3 weeks ago, here's a quick recap.

What They Do WebSideStory is a leading provider of on-demand digital marketing applications and on-demand web analytics solutions for over 1,100 customers in the US. These web analytics solutions enable organizations to understand how Internet users respond to website design and content, online marketing campaigns and e-commerce offerings.

What We Like We think WebSide's web site tracking services compliment the boom in industry white papers and reports on Internet trends. WSSI's top line is on steroids: sales jumped nearly 100% to $40M in 2005. Four weeks ago, the firm's key product, HBX Analytics, won a major industry award for its excellent reporting, e-commerce capabilities, technical support and project management. Six weeks ago, WSSI unveiled Search 4.0, the first site search solution to integrate site search and behavioral data. While the market for e-commerce performance gauging is still in its nascency, there is no doubt that the internet's astronomical rise and global household penetration means that companies are more and more interested in pin-pointing the efficacy of online marketing campaigns. The demand for the type of service WebSide proffers is unmistakably there. If WSSI can't execute, the company will surely be snapped up: from a competitor's vantage point, WebSide's customer base is a market-share-grabbin' layup.

Valuation Story Analysts expect a 35% jump in earnings from 2006 to 2007. Right now, shares are going for less than that -- 19.4 x 2007 numbers. Given the intense competition in the Web analytics space (there are several smaller, private players on the field), we understand investor's concerns. But WSSI weathered the tech bubble burst better than most of its peers (ahem, it survived) and the company is coughing up 25% gross margins, a debt free balance sheet, and heavy insider ownership. Most importantly, WSSI's rivals have less access to capital. With just 7M shares in flotation, WebSide story is not without its risks, so make sure you kick the tires once or twice before putting the stock in your retirement account.

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