Berk Sure Has A Way

Putting my mouth where my money is.

Foolish MCHX Myths

with 4 comments

Motley Fool’s Rick Aristotle Munarriz had an article about Marchex this week. I thought I would address some of what Rick said. All quotes in this article are his and the full article is here.

Rick: “Anyway, Marchex certainly wouldn’t seem to be a company in need of fixing. The stock has shot up nearly 80% since bottoming out in August. Marchex is profitable and, last month, posted a 110% spurt in revenue.  The company toils away in the lucrative online advertising market. It owns a few contextual pay-per-click marketing outfits like IndustryBrains and Enhance Interactive.”

Myth 1: 110% spurt in revenue – this is not on a pro forma basis. Y/Y revenue growth was 25% and the business has only grown 7% from Q1 to Q3 of this year. See my post about the lack of organic growth at MCHX.

Myth 2: lucrative online advertising business – this is true only for traffic owners. Enhance, IndustryBrains and GoClick are low margin businesses that need to share most of their revenue with their partners. In the case of Enhance and GoClick, these partners are likely low quality traffic sources. Less than a third of Marchex’s revenue comes from traffic they own.  See my post on Enhance and GoClick.

Rick: “Anyway, if you want to know why I bought Marchex, it’s because one of its biggest domains is hardware-update.com. It may not exactly roll off the tongue, but it was a site that Microsoft (Nasdaq: MSFT) used to send users of Windows 2000 to when they received hardware-related error messages. Some schmuck at Microsoft forgot to renew the domain, and a company that Marchex went on to acquire gobbled it up.

However, if you go there, you’ll see that the sponsored listings have little to do with Windows operating system problems, computer upgrades, or attractive peripherals. No, most of the ads in the main body of the page are for replacement windows for the home. Talk about a blown opportunity. I have no idea how poorly targeted the other Marchex properties may be, but although this might be indicative, my excitement is still there. It’s an easy fix, and it represents untapped profit potential that will come around once the company wakes up from its shortcomings.”

Myth 3: All of MCHX’s domains have long term value. Some of MCHX’s domains have inherent value (debts.com for example) as type in direct traffic destinations. But some of MCHX’s domains (e.g. hardware-update.com) are expired links with residual traffic from existing links on the web. Without the external links from Microsoft, no one would ever find hardware-update.com. Marchex could invest in making these domains more targeted, but over time (usually a few years) expired domains lose almost all of their traffic as links are removed or replaced. See the Alexa traffic chart below to see how this domain has lost traffic over time – even though it has been mentioned in a few articles recently it still is not in the top million sites even though it used to be. Revenue from these domains with expired links will need to be replaced with new sources or prove to be a drag on MCHX’s revenue and profits.

Hardwareupdate_traffic

I own puts on MCHX shares.

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Written by Kevin Berk

December 8, 2005 at 10:06 AM

Posted in Picks and Pans

4 Responses

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  1. MCHX STRONG BUY, stop the bashing at once.

    Jim Cramer

    December 8, 2005 at 6:23 PM

  2. It sounds to me that Berk has a bad taste in his mouth from a previous employer. He mentioned that he was previously employed by a 2nd tier network and it sounds like they may have parted on poor terms. This could be the reason he is so into bashing 2nd tier networks. Though it is known that many 2nd tier networks are suspicious when it comes to traffic, why do you think more and more people put their money into MCHX? Perhaps they realize that MCHX has better management than other 2nd tier networks. If anyone is going to make a 2nd tier network work, Russ Horowitz and the MCHX team will.

    Berk Bashing

    December 12, 2005 at 10:40 PM

  3. I worked at LookSmart and left to start my own company. The people at LookSmart are great folks. The company struggled in a tough market segment and the loss of their biggest partner – but survived, unlike many of the dotcom’s from the 90’s.
    As for MCHX’s management, they seem to be doing a good job with a tough situation, but that doesn’t change the fact that the tier 2 search business is challenging and their stock is overvalued.

    Kevin Berk

    December 13, 2005 at 9:04 AM

  4. Great post, I too believe Marchex is a sell at these levels. They base their business off of domain parking, something most internet users hate. If the product is a disservice to consumers, it is on some levels unethical. While in the short-term this may work out, it will eventuall catch up to them.

    The New Wall Street CEO

    January 19, 2006 at 9:50 PM


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