One of the toughest jobs for businesses when they are starting out is choosing the name that will represent the company. For example, when Starbucks was first named, many commentators and business experts questioned why a company that wanted to sell coffee would choose a name that didn’t inspire any connections with coffee, Arabica beans or early mornings. McDonalds had the same problem initially, taking it’s name from its founder, rather than the more direct approach taken by it’s main rival over the years which simply told customers that it was the “Burger King”.
Luckily, Tree dot com (TREE) has avoided those issues. First of all, the registered business name is also the website, which means that every time someone refers to the business, it also refers to the website that potential customers can be directed to in order to find out more about the company. Secondly, and more importantly, Tree dot com has taken the metaphor of a tree, which applies perfectly to its services: helping its customers grow financially.
The market has recently woken up to the potential for growth that Tree dot com offers, with the share price rocketing from a range between $25 and $35 to a close well over the $45 mark with the most recent traded price being $36.16 on November 5th, 2014.
So the question becomes, is the share price growth sustainable, or is it just a temporary spike?
Understanding the Business
Tree dot com (TREE) is a provider for financial information for a range of products. The company owns a range of brands or online “mastheads” that it uses to cross sell products and services to browsers on its sites.
Broadly speaking, the segments of the business grouped in the following areas. Lending Tree offers customers access to mortgage brokers, banks and loan brokers through an extensive range of over 300 financial institutions and partners through the Lending Tree and Get Smart websites. These services allow homeowners to refinance their homes for lower repayment rates, or access funding sources that allow them to vary their repayments to suit their personal needs.
LendingTree Autos provides a similar service for buyers of cars, trucks and motorbikes in the new and used market. While the market value of automobiles when compared to home loans is lower, the company uses its scale and partners to offer lending solutions for cars, and is targeting the segment as an area for future growth.
Similarly, LendingTree education, InsuranceTree and LendingTree Home Pros offer solutions for those seeking comparison services in higher education qualifications, insurance comparisons and home renovation and professional services.
Metrics and Measures
The sudden and dramatic share price re-rating for Tree dot com was based on a quarterly earnings report that surprised the market in a positive way recently. Revenue was up a respectable 11% to $41.3 million when compared to the same quarter in 2013.
Other notable figures were a 7% increase in net income, which was strong as a proportion of revenues at $5.8 million. The strength of these numbers led Tree dot com (TREE) to increase their forward guidance numbers, including an increase for full year revenue to $164-$166 million, which implies that revenue for the fourth quarter should again be a growth figure of around $42.5 million.
The other notable thing to come out of the results was that the main mortgage broking and lending business of Tree dot com had declined somewhat. The fact that the overall business was able to grow was a result of focus on expanding segments such as LendingTree Auto, Education and Insurance as the core Tree dot com brand became better known and trusted.
The Investment Case
The investment case for Tree dot com is a similar one to that facing almost every Internet only business. The core problem is attracting the required number of viewers to convert to customers to make the website and business worthwhile. Some brands do this naturally or “organically” like Facebook and Twitter, who do not have to run television or newspaper advertising to tell people about the service because they used their unique features and cultural reach to attract browsers.
However, financial services cannot grow in the same way, and require advertising to sell their benefits to customers.
As a result, one of the most important figures to watch when looking at Tree dot com is the marketing spend as a percentage of revenue, as heavy marketing spending is required to continue attracting browsers.
The other thing to consider is competitors, as with online only business, the dominant player often has a huge advantage over its rivals. You can see this when you compare Trulia and Zillow to the third placed challenger, Move, in the online real estate advertising market. Many large financial institutions and websites offer comparison services, and Tree dot com is undoubtedly a new and smaller player in this space.
Finally, a positive in Tree dot com’s favor is that the CEO and founder remains still involved in the day-to-day running of the company. Having the founder on board means that there is still an entrepreneurial spirit and passion that only first owner of the company brings to the table.
Tree dot com is an innovative business operating in the online only space. Because it is an online only business, it has low costs, but requires a high level of marketing spending to gain browsers to convert to customers. It has established a network of websites in a range of areas that allows it to diversify its business model and use cross-selling efficiencies, but it is not a dominant player in any of the segments it operates in. Future success is dependent on becoming a leader in one segment and using that success build other successful segments which can become “pillars” of the company.