J2 Global (NASDAQ:JCOM) is in a real interesting space at this point in history, but that doesn’t necessarily make JCOM stock a buy. Every industry goes through predictable bouts of hype, growth, investment and consolidation.
With the consumer internet now approaching its 25th anniversary, it has clearly entered its consolidation phase.
A primary feature of consolidation is the “roll-up,” companies built from a collection of parts they intend to wring maximum profit from before the business models die. Interactive Corp (NASDAQ:IACI) may be the best known of these companies, with sites such as Ask.Com, HomeAdvisor, and Match.Com. It regularly buys, sells, and spins-out sites to maintain profits.
But there are other, smaller companies built on this model, and one of the most interesting is.
A Brief History of JCOM Stock
J2 dates itself to 1995, when a German musician named Jaye Muller and a music producer named Jack Rieley launched JFax, which used the internet to replace the functions of a fax machine. It still does that business, as eFax, but it’s an obscure part of an obscure division it calls business cloud services.
JCOM may be best known as the owner of Ziff Davis, the old computer magazine chain bought in 2012 for $167 million. Ziff had previously been split from its own digital unit, ZDNet, now owned by CBS (NYSE:CBS), but J2 rebuilt it with IGN Entertainment, a games magazine publisher it subsequently bought from News Corp., then part of 21st Century Fox (NASDAQ:FOX).
Since then, under CEO Vivek Shah, who came to the company with Ziff Davis, J2 has been acquiring small companies on the periphery of computing left-and-right, including computer publishers like Computer Shopper, online news sites like Mashable, and software companies like iCritical. Its biggest deal was Everyday Health, then publicly traded, acquired in 2016 for $465 million.
Taking Apart JCOM Stock
What these acquisitions all had in common was cash flow that could be squeezed for profit from sound management. It’s the equivalent of a small businessman who builds a fleet out of used cars and trucks and keeps them running for profit for as long as possible.
The company didn’t come onto my investment radar until it bought Downdetector, a Dutch site, early this year. It’s one of five companies JCOM bought in the last quarter. Downdetector tracks site outages like the recent YouTube failure at Alphabet (NASDAQ:GOOGL).
At last count Downdetector was only bringing in a few thousand dollars a week on its own, but as outages increase, and interest in them increases, it could make a profit.
Put it all together and J2 revenue nearly doubled from 2014 to 2017. Operating earnings have been growing steadily. Operating income for the first two quarters of 2017 came in at $205 million, against $264 million for all of 2017. This has built a market cap of nearly $3.7 billion.
Investors may worry about the debt used to do this, which now exceeds $1 billion, but management has been beating earnings estimates.
Also, while the group is vulnerable to a recession that takes out weaker businesses, many of the company’s niches have already outlived their competitors. These global internet niches can be maintained in the developing world long after they become obsolete in the West.
The Bottom Line on JCOM Stock
J2 is due to report its September quarter on Nov. 5, with analysts expecting earnings of $1.41 per share on revenue of $294 million. Only eight analysts currently follow the stock but six have it on their buy lists.
JCOM stock is one of those hidden gems that investors are constantly seeking, either as a growth story or as a collection of assets that could itself be acquired by a larger player. It’s worth looking into closely.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.