An interesting company that is new to the market for investors to consider buying is System1 (New York stock market :OHS). Owner of some major iconic websites, the company itself is certainly not a household name. But chances are you have visited at least one of its sites in the past. The recent growth achieved by management has been quite impressive. And while the company’s fundamentals are still somewhat vague due to some recent transactions, stocks are trading at levels that should generally be considered attractive.
System1 – An Owner of Key Internet Assets
Today, System1 describes himself as an omnichannel customer acquisition platform. The company says its main goal is to provide high-intent customers to its advertisers and their own subscription products. The company achieves much of its success through an acquisition marketing platform called RAMP. This platform has three main components that investors should be aware of.
The first is that the platform uses machine learning to identify and direct marketing campaigns to customers across major ad networks. Second, once these potential customers respond to or interact with the company’s marketing efforts, the platform then directs them to the company’s own network of 40 owned and operated websites which, in turn, puts focus on qualifying customers’ buying intent, as well as providing the company with valuable data. From there, the company then works to monetize customers by showing them ads that they are likely to click on.
Currently, System1 has a large portfolio of Internet properties. For example, the company currently has search engines such as info.com and Startpage.com. He also owns digital media sites such as HowStuffWorks, Mapquest, and WalletGenius. For the last quarter, the company said its portfolio of digital assets received an average of 185 million visits per month. That’s a significant amount of traffic, all things considered. Prior to this year, System1 was not a publicly traded company.
Another property of the company is Protected.net, which offers software that provides online security to its customers. It wasn’t until January this year that the company completed a tie-up with Trebia, which technically bought System1 before changing its name to this one.
Although System1 has been around for a while, fundamental data about the company is rather limited. We do know, however, that in its 2020 fiscal year, the company, on a pro forma basis, generated revenue of $566.9 million. Revenue growth has been quite strong for the business, with sales reaching $832.9 million in 2021. This represents a 46.9% increase over the business generated in 2020. For investors who might feared it was a one-time increase, the answer is that it probably wasn’t. For its 2022 fiscal year, the company currently expects revenue to climb to around $1 billion. This would represent a 20% increase year over year. Most of this growth will be organic. But the company also acquired two other major properties, RoadWarrior and CouponFollow, in deals that alone will add $25 million to its revenue. These revenues are included in management’s expectations for the year.
As far as the company’s results are concerned, the situation has also improved. Net income, for example, fell from $3.1 million in 2020 to $76.5 million last year. There are, of course, other profitability parameters to pay attention to. One of them is EBITDA. According to management, this amounted to $62.5 million in 2020 before climbing to $127.1 million last year. If we use EBITDA less interest expense as an indicator of cash flow, that metric would have fallen from $36.4 million in 2020 to $101 million last year. Regarding the outlook for the year, management stated that it waits EBITDA totaling approximately $174 million. This includes approximately $15 million associated with its aforementioned acquisitions. By my estimates, this implies an operating cash flow of approximately $147.9 million.
Given these numbers, we can attempt to price the company. Based on price to operating cash flow, using the company’s results for 2021, we can see it trading at a multiple of 21. If instead we were to rely on estimates for 2022, this multiple would fall to 14.3. Another way to view the business is through the lens of the EV/EBITDA multiple. That would give us a reading of 19.2 based on 2021 results for the company. The 2022 results, meanwhile, would give us a reading of 14.
Generally speaking, when I write about a company, I like to try to benchmark the company against similar players. The fact is that there are not many similar companies here. But I looked five that I felt were closest. Four of them had a positive price/operating cash flow multiple, while all five had a positive EV/EBITDA multiple. On a price/operating cash flow basis, these companies ranged from a low of 9.1 to a high of 48.9. Three of the four companies that had a positive reading were cheaper than System1. Meanwhile, using the EV to EBITDA approach, the range for the five companies was 12.8 to 73.8. In this case, two of the five companies were cheaper than our prospect.
|Company||Price / Operating Cash||EV / EBITDA|
|Because Gurus (CARG)||48.9||24.6|
|DHI Group (DHX)||9.1||17.8|
|Taboola.com (TBLA)||N / A||73.8|
Currently, System1 is an interesting prospect for investors to consider. The company continues to grow rapidly and appears to be under-following as it only recently went public. All things considered, the company’s shares don’t look that expensive. Considering the rapid growth that management has achieved, I would be so inclined to acknowledge that the company may be slightly undervalued.