8/1/14

Short MCHX ($11.1)

Today's target is a low margin digital call advertiser that has risen substantially due to the overall internet bubble we are currently trapped in. Marchex is up 83% over the past year and 215% over the past two years.

• Overvalued - 300+ P/E and 45x EV/EBITDA
• Environment - Highly competitive with low barriers to entry. If the call based ad market grows substantially, major players like google would enter and MCHX would be gone.
• Flawed Business Model - MCHX relies on fees from completed sales, typically $10 - $30 per sale. As the market matures, this fee will be unsustainable and local businesses will never pay this much. The company is an unnecessary middle man. 
• Customer Concentration - Top 5 customers represent 60% of business. This gives them significant bargaining power on a business with miniscule margins already. Not to mention the fact that if a single customer from the top 5 went internal with their campaigns, results would be crushed.
• History of Cash Burn - To date, MCHX has burned through $200+ million in cash while pivoting their business model and attempting to turn an ever elusive profit. In March, they held a secondary equity offering - indicative of their continued cash  burn and equity dilution.  

MCHX could surprise with a short term earnings beat next week, but long term their fundamentals and business model will face ever stronger headwinds.

Sept 12.5 puts are a good alternative to shorting.