Valueclick (VCLK) surpassed street expectations when it reported earnings yesterday afternoon, but Citigroup’s Mark Mahaney was not impressed.
In a report released this morning Mahaney downgraded the VCLK shares to “Sell” from “Hold,” citing the following concerns:
- Continued deterioration of its lead generation business as advertisers move more toward display and search advertising during the second half of the year. Since this is a high profit margin business, the company’s overall profit margins could suffer.
- Increased competition from Google and Yahoo for the display advertising market.
- Affiliate marketing revenue (essentially referring customers to other e-commerce sites) was the lowest its been since Q3 ’06. In addition, if more states adopt an Internet sales tax, Mahaney believe e-commerce companies will likely scale back their affiliate marketing relationships, which would hurt Valueclick’s revenue.
Of course, these competitive and secular issues didn’t come out of nowhere (the Internet sales tax issue and competition from Google and Yahoo is not new). In addition, Valueclick’s lead-gen business has been weak for a while now (down 20% sequentially in Q1 ’09) so one has to wonder why downgrade now?
Mahaney did note that there is a chance management could find ways to outperform despite tough secular and competitive issues, or the company could even get acquired. Still, investors appear to be responding – VCLK shares are down about 16% this morning.
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