Blucora

How much would you pay for a business that should produce near mid double digit revenue growth rate at least for the coming few years which generates ~40% EBITDA margin? 10 times EBITDA? 15 times EBITDA?

Introducing Blucora.

Blucora operates in 3 areas: Search, Tax Preparation and E-Commerce.

Search
The Blucora business model is simple to understand, just think of it as a value added reseller of search engines. If a website owner, lets call him Shaun, wishes to add search functions on his homepage but do not have the expertise or technology to do so, he contact Blucora. Blucora will then contact Google or Yahoo to syndicate their search results. Blucora would then build out portals for Shaun and when someone clicks on a paid ad at his website, everyone gets a cut.

Pretty interesting.

In addition, Blucora owns several legacy search engines such as dogpile.com and webcrawler.com which believe it or not, people still use.

Tax Preparation
Blucora also owns TaxACT. It is a wonderful business. It is a fast growing online tax preparation firm. To understand how wonderful this business is, we have to understand the industry.

The tax preparation industry is dominated by Paid Preparers and the DIY people. Paid Preparers are tax stores such as H&R Block while DIY people are people who fill taxes using paper and pen and online. The market share of each is more or less split, although Paid Preparers is probably the front runner. For now.

Within the DIY segment, more and more people are shifting to online from paper and pen, AND, Paid Preparers are losing market share to the DIY segment. Although, the Paid Preparers will probably have a strong competitive edge due to complexity, but regardless, TaxACT is at the right segment of the industry. In addition, TaxACT has a wonderful business model which creates stickiness. When you are able to create stickiness at an early part of a growth phase and is able to generate high cash margins on that stickiness, you get very interesting results.

E-Commerce
Blucora also own Monoprice, an online retailer that sells consumer electronics under its label. I dont have much of a thought on this segment but it seems to be generating significant free cash flow so that is good.

Valuation
So, currently H&R Block, a paid preparer, trades at 8.2x EBITDA and had low single digits revenue growth. On the other hand, TaxACT had near mid double digits revenue growth rate in 2013. In addition, TaxACT have a lower reinvestment requirement. So, what is the right multiple for such a business?

Well, lets just slap on a 8.2x EBITDA and see what we get. Using the 2013 values (I dont use the LTM due to effects of seasonality, but it is much more conservative anyway), Blucora Tax Preparation business is worth $285 million.

With a 8.2x EV/EBITDA, Blucora Search and E-Commerce implied EV/EBITDA is 4.6x. Wow. 4.6x implied EV/EBITDA is distressed level. Assuming 0% growth, 4.6x EBITDA would imply a ~22% discount rate. That is quite...aggressive, and this is the Bear Case. Using a more conservative, albeit still high, discount rate of 18% and with 2% growth, the implied EV/EBITDA should at least be 6.1x. The Bear Case would then imply a 16.2% upside.

Catalyst

Due to the cash generative nature of this firm, I think that time will be its own catalyst in this case.