Citigroup Upgrading WebMD To Buy On Defensive '09 Outlook & Valuation

Citigroup analyst Mark Mahaney upgraded the shares of WebMD (WBMD) to Buy from Hold after the company's 4Q08 earnings report. WebMD beat Street estimates and provided 1Q guidance ahead of Consensus. The company's advertising business is surprisingly strong given the challenges at other online advertising companies like Bankrate, Yahoo, and I add CBS owned CNET. The analyst thinks this is due to the fact the WebMD is a must buy for biopharma advertisers who do not have a more effective alternative. The risk-reward scenario is also favorable with 10% downside compared to a potential 25% upside.

This is one of my small/mid-cap Tech favorites but I am not ready to jump in given the 16% jump in the share price after the upgrade. I would wait for a pull back before jumping in at these levels.


From Mark Mahaney
• Solid Beat & Raise Q4 Results - WBMD reported Q4 Revenue of $112MM, ahead of Citi/Street at $106MM, and EBITDA of $34MM, ahead of Citi/Street at $32MM. WBMD also reiterated its '09 guidance and introduced Q1 guidance that was modestly ahead of the Street.

• Modestly Raising '09 EBITDA Estimate - '09 EBITDA estimate raised 3% to $114MM. PT maintained at $25 - 10X '09 EBITDA or 9X '10 EBITDA.

• Why The Upgrade? - 1) $20 or 7X EV/EBITDA appears to be a good support level, implying 10% downside and 25%+ upside; 2) Cash & Investments = 27% of WBMD's mkt cap; 3) Q4 results showed positive momentum - 21% Y/Y Internet Advertising growth, with strong 30% Y/Y Page View growth; 3) WBMD's outlook for 15%-25% '09 Advertising growth stands in sharp contrast to YHOO's and RATE's Display Advertising Decline outlooks; 4) WBMD is a must-online buy for biopharma advertisers, who are concentrating more of their online ad spend with WBMD; & 5) With approx 75% of marketing contracts with WBMD signed on 6-12 month basis, WBMD has unusual visibility.

• Putting WBMD In Context - Consistent with our prior reports, we view WBMD as one of Four Sub-$2B mkt cap Internet core stocks - along with RATE, NFLX & NILE - with currently the best combination of robust long-term growth outlooks, reasonably deep competitive moats, top management teams, and attractive business models. We refer to these as When Stocks - as in When To Buy them. We think the time is now for WBMD, based on valuation and our '09 outlook. Hence the upgrade.