Doc,
Check out this great article by Matt Ragas...
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***RAGAS SPEAKS FOR THE WEEK***
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Is the honeymoon over?
Here comes the bride -- all dressed in red ink and a declining stock price.
That's the reality that TheKnot.com's (KNOT) Chief Executive Officer, David Liu,
must face. So far, The Knot's relationship with Wall Street has been rocky, and
judging from the market's reaction, it's going to take more than a good divorce
lawyer to get Liu out of his current predicament.
Since going public in early December of 1999 at $10 a share, this online wedding
resource Web site has done nothing except head south. The Knot has become part
of the growing "dot-com graveyard" -- those splashy Net IPOs of yesteryear that
have been forgotten by analysts, fund managers, the media, and nearly everyone
else in between. Based on Friday's closing price of 7 7/8, the company now
sports a deflated market cap of only $110 million, a drop of $100 million from
the company's first day closing price. Clearly, investors are thinking this
shotgun wedding was a bad idea.
However, after digging into the underlying business model of TheKnot.com and the
market that the company serves, I believe I may have found a fledgling Net
company worth a second look. Consider for a second that the domestic wedding
market generates over $45 billion in retail sales each year. Also keep in mind
that traditional wedding magazines command advertising rates on average 3.5
times higher than general interest women's magazines. In addition, this one
wedding site happens to be backed by the likes of America Online (AOL), shopping
giant QVC, and established venture firm Hummer Winblad. One would be hard
pressed to find a more distinguished group of marquee investors.
To top it all off, based on The Knot's current valuation of $110 million, and
current cash position of nearly $32 million after a recent acquisition is
completed, I am left staring at a market cap that is comprised of almost 30%
cash. Having a little downside support is never a bad thing. I also find it
interesting that The Knot has been aggressively looking to establish its brand
and products beyond the Web. As frequent readers of this report know, I remain
extremely intrigued with Net companies that are integrating offline media into
their core businesses. I decided it was time to go to the "cyberstock chapel"
and take a closer look at The Knot.
Untying the fraying Knot
The Knot currently offers the standard fare one would expect to find at any
vertical destination site. It offers a solid blend of content, community,
communications, and commerce features all wrapped around wedding planning. The
company currently relies on a key relationship with AOL, its initial outside
investor, for providing a significant amount of its total traffic and
distribution. According to SEC filings, AOL members were responsible for
roughly 40% of the company's total traffic in 1999. The Knot also enjoys
distribution deals with AOL properties AOL.com, Netscape, and Compuserve. While
it is never encouraging to see a company relying on one relationship for so much
of its business, AOL's 8% equity stake in The Knot suggests that the company is
on solid ground in the foreseeable future.
The Knot made a variety of small acquisitions last year to broaden its suite of
services. In July of last year, it acquired Bridalink.com, an online wedding
supply store, and Click Trips, a small online travel agency. In August of last
year, The Knot also scooped up Wedding Photographers Network, a searchable
database of wedding photographers. These moves are an attempt to enhance the
e-commerce side of the company's business, led by The Knot Registry. The
registry was launched in November of 1998, and today features over 10,000
products from over 450 retail brands. As part of a $15 million strategic
investment made by QVC in April of last year, The Knot began outsourcing
customer service and order fulfillment for The Knot Registry to QVC.
Pushing the brand beyond the Web
While the AOL and QVC relationships strengthen The Knot's online distribution
and e-commerce efforts, the company has also been aggressive in building its
brand offline. Through a three-year agreement with Broadway Books, a division
of Random House, The Knot published a wedding guide in January of last year that
has sold over 40,000 copies. The company also released a wedding gown guide
last summer that is being sold on its Web site, on QVC, and at bridal trade
shows. In addition, The Knot is the exclusive online sponsor of the Great
Bridal Expo, a traveling trade show dedicated to the wedding market.
These partnerships all suggest to me that the company's management team is
filled with forward-thinking individuals who understand that Internet users
don't exist in a vacuum -- they do eventually venture offline and live their
normal lives as well. While the aforementioned offline media deals probably
won't translate into significant revenue for The Knot's business, I believe the
company's acquisition of Weddingpages, Inc. for $8.5 million in cash earlier
this week was an incredibly savvy move.
Weddingpages is currently the largest publisher of regional wedding magazines in
the U.S. This acquisition takes The Knot a giant step beyond the alliance it
entered into with Weddingpages last summer. Think about what the company gains.
The Knot will become the only online wedding site positioned to attack
localized wedding markets, with a sales force in over 50 U.S. cities. In
addition, The Knot now gains crucial access to local vendors in each of these
markets, as well as the existing reader base of Weddingpages, which can now be
weaned over to The Knot's Web site. When one considers that over eight million
couples have used Weddingpages to plan their wedding, the acquisition starts to
look incredibly cheap.
Grappling for proper valuation
On Tuesday, The Knot reported fourth quarter revenue of $2.5 million, a 105%
increase over last year's numbers, and a 31% sequential increase in sales.
Losses rose to $3.2 million for the quarter, although metrics continue to grow
nicely for The Knot. Cumulative membership has now surpassed 500,000, a 290%
increase over last year's total. Monthly page views rose to 22 million a month,
compared to only 2.5 million a month during the same period last year.
While these numbers are still quite small when compared to the metrics of larger
verticals, they suggest to me that The Knot is heading down the right aisle.
Assigning a proper valuation to The Knot is a little bit of a stretch, but the
company's annualized revenue run rate of $10 million suggests that the company
is currently trading at a price/sales ratio of 11. For comparison (keeping in
mind The Knot is the only publicly traded wedding site), vertical women's site
Women.com, on its current run rate, trades at a P/S ratio of roughly 12.
Another vertical destination, iTurf, which targets Generation Y users, currently
sports a P/S approaching 12 as well. When compared to these other two, one can
argue that The Knot is already close to being fairly valued. However, I believe
the company's strong cash position, dominant position in the wedding vertical,
and strong partnerships warrant a higher premium.
If The Knot continues to execute, it will be hard for analysts and investors to
ignore this company for too long. After all, one can snicker about a publicly
traded company geared towards the wedding market, but the reality is that a $45
billion opportunity is nothing to joke about. This is one rocky marriage that I
can see rebounding very soon.
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