School Days at Blackboard (ICGE owns over 2m shares as of 9/30)
11 Nov 2005
The company's software is a mainstay at many universities.
Please read this first: Following is an independent investment commentary and analysis from the Reuters.com investment channel expressing views that are not connected with Reuters News.
Blackboard (BBBB) is a programmer of networked educational software, which is in use worldwide. Not only are its sales on the upswing, but it announced plans to acquire WebCT, a former competitor. Recently, Blackboard appeared on the Reuters Select Consensus Choices screen. Though it is difficult to pin down a valuation for the stock, it appears that upside surprises are possible.
Riddle Me This
What's brown and sticky?
That the riddle that's all the rage among the 12-year-old set, according to my teacher friends. I bring this up because today's company, Blackboard, caters to the educational market, and this is likely to be the only excuse that I have to insert this joke into one of these articles.
Anyway, Blackboard makes software that helps educational institutions to communicate with constituents in their communities in various ways. At the most basic level, this permits instructors to efficiently communicate with students. One person in the office is taking classes at a Blackboard-equipped university, and she showed me her personal Blackboard homepage. She had the list of her classes there, and each one linked to a course homepage. There she had access to the syllabus, various files that her professors had provided and communications from the professor to the class as a whole. Assignment due dates are presented on a separate calendar as well.
What confused me at first about Blackboard's software is that most of this functionality is provided for free by Yahoo! in its Groups section. Considering that Blackboard's suite costs thousands of dollars, it just didn't make sense to me that colleges were paying for it, and, I might add, in droves. Upon closer examination, though, it provides more functionality than Groups. First, the calendar includes not just assignment due dates, but also university-wide events and dates. (I hope that she has her immunization records in by November 9, the due date at her university.) That kind of broad communication isn't really possible using just groups and e-mail mailing lists. Well, it is, but information overload quickly becomes a problem. Blackboard's interface organizes the information really well.
Security and Integration
Still, that's not enough to explain Blackboard's sales success. (The company's top line was up 21% year-over-year in the third quarter.) I'd say that there are two aspects to the software that explain it. First, it's secure. Truth be told, I've gotten enough spam from Yahoo! Groups that I know how easy it is to become a member of a group that doesn't want you. Considering the sheer money to be made from classes, that's a big, big plus in Blackboard's favor.
In fact, Blackboard offers an additional piece of software that provides total electronic ID card functionality. By that I mean that students (or anyone, really; it's a separate piece of software) can use their ID card to enter restricted areas, use it for transactions like meals, parking or the like, and use it in the library. That's a useful suite, and it highlights the security features built into all Blackboard software.
The second aspect of the software that other group management solutions don't offer is integration with major textbook publishers. This represents a competitive advantage for the company. Textbook publishers can provide modules for their books, and these can include supplemental information or files. Finance, for instance, is a discipline that typically makes extensive use of spreadsheets, and these can be included in a publisher module. It is this total integration with all participants in the educational process that makes Blackboard software so interesting.
The WebCT Deal
The big news regarding the company, though, is its announced purchase of WebCT. As the press release notes, the exact terms won't be known until the deal closes, but Blackboard will pay $180 million for WebCT. (The uncertainty is that WebCT has some cash on its balance sheet -- $26 million as of August 31 -- which will reduce the price by that amount.) Near as I can tell, WebCT does much the same thing as Blackboard, but it has more of an international footprint. While this is significant, the integration of a competitor makes just as much of a compelling argument for the merger.
Blackboard is a small-cap stock with a relatively short trading history (it went public in 2004). This presents some issues in analyzing it. The volatility of the stock is hard to pin down, for one thing; IPOs and mergers tend to add to volatility, and there isn't a long-enough history to definitively say what the beta is anyway. I've assumed the industry beta for my analysis. Software companies have an overall beta of 1.8, though, which is quite shaky. I'd classify Blackboard as a high-growth, high-risk stock, and this suggests that the beta may be even higher in actuality.
The price-to-earnings metric that should be used for Blackboard is another issue. Given the two most common options, the trailing-12-month P/E ratio and the price-to-earnings-to-growth (PEG) ratio, I'd tend toward the former. The PEG ratio starts becoming distorted in high-risk, high-growth situations, and this is one of those situations. Using the industry beta and the trailing-12-month P/E ratio suggests that the current stock price reflects an 8.6% growth rate.
The Problem With Analysis
The big issue is two-fold: First, my analysis indicates a 25.1% potential growth rate for Blackboard. Second, the PEG ratio seems to reflect a growth rate of 26.2%, which would be just about fairly valued.
Frankly, this puts this into a situation similar to my analysis of True Religion Jeans a few weeks ago: I have no idea what the true, underlying value of the Blackboard is. I would, however, put a few provisos in here. First, stock price will typically be depressed after a company announces that it is going to be an acquirer. Second, the WebCT deal is expected to reduce the official earnings in 2006 -- Blackboard will need some additional debt to finance the deal, and this will result in an increased interest expense. The growth rate in 2007 and after should be higher, though. Both of these suggest that the potential for upside surprises exist for Blackboard. While this company is probably only appropriate for the risk-tolerant, growth investors might want to take a look at it.
Oh, I almost forgot. What's brown and sticky? A stick. Buh dum dum. |
