Tech firms’ hidden exposure to subprime
Written by: Zack Miller | February 29, 2008
At Israel Opportunity Investor, we’re spending a lot of time with CEOs recently asking about their views on the future. What’s interesting is that some tech companies are beginning to see a connection between the subprime fiasco and their own businesses.
So, we decided to do a rundown on firms that we think may have some exposure, hidden or not, to the subprime mess.
Companies dependent on ad revenue from housing/mortgage lenders and further downstream secondary effects
Bankrate (Nasdaq: RATE) should be the bad-boy of the subprime mess, but this thing holds up like a champ. There is a large short
interest against the stock but the firm recently received some big upgrades after trading softly, as the market was expecting some shortness. RATE operates in two segments: one online and the other offline. Bankrate acts as a data aggregator of all kinds of rates (mortgages, interest, etc.). Acting as a middle man, Bankrate gives syndicates its data out to its network of traditional web publishers (frequently for free) who publish these rates. Users who click through on rates are then taken through a 6-step process intended to generate a mortgage or savings account lead. Bankrate gets paid by its advertisers and shares out these revs in a split with its publisher partners. The short argument is pretty straightforward — as more and more talk of an interest rate reset freeze, this could trigger a decrease in traffic linked to refi’s. Bankrate’s customer base has traditionally not been subprime, so you have to do your homework in terms of its exposure to this market.
If Bankrate truly does tank because there is less refi traffic, than any publisher that receives significant revenue from Bankrate would suffer as well as they’d get less of a payout. Move.com (Nasdaq: MOVE) is a recent addition to the network and Bankrate also has Yahoo! (Nasdaq: YHOO), America Online (NYSE: TWX), The Wall Street Journal (NYSE: NWS) and The New York Times (NYSE: NYT) in its network.
Google (Nasdaq: GOOG) has traditionally seen a lot of mortgage related keyword bidding with some refi/subprime keyword being very lucrative for the firm. Google says its not affected by what’s happening but you have to think that demand for certain keywords has softened. That said, when advertiser scale back, they’re frequently reallocating offline funds to online — and search generally has the best ROI.
IAC (Nasdaq: IACI): Owns Lendingtree, which is one of the largest players in the lead generation game, along with Lowermybills.com, now owned by Experian. Lendingtree allows users to submit a mortgage request and then mortgage firms bid on the business. Lendingtree gets paid by the lead. By keeping a limited number of bids per every RFP for a loan, Lendingtree can juice the fees it gets paid for leads.
Yahoo (Nasdaq: YHOO): A lot of estimates point to Yahoo having the largest share of mortgage-related display advertising - totaling approximately $225 million for the 12 months ended July 2007, according to a research piece by Bernstein. This ?means? that approximately 18% of Yahoo!’s online display advertising revenues in the last 12 months came from mortgage-related advertisers.
Companies affected by less spending money at the household level
Earthlink (Nasdaq: ELNK): While Earthlink has transitioned many older customers to DSL, they still have a sizeable business in the 
dial-up, lower end of the market. They’re hurting here anyway and what’s going on in subprime land can’t help.
Callwave (Nasdaq: CALL): Dialup customers use this to divert incoming calls to voice mail while they are online surfing. This targets the lower end of the market.
DealerTrack (NAsdaq: TRAK): provider of on-demand software, network and data solutions for the automotive retail industry, also facilitates credit applications. People stop buying/financing cars, dealers use less on-demand software.
IDT (NYSE: IDT) IDT does a lot of business in the affinity calling card industry. These specifically target lower means minorities, already suffering from the mortgage squeeze.
Companies like Harris Interactive (Nasdaq; HPOL), and Greenfield Online (Nasdaq:SRVY) internet-enabled polling and survey firms may see reduced business as their clients, primarily B2C, mass market firms ease up on spending as the US consumer weakens.
Construction/general real estate effects on certain tech companies
Tyco (NYSE: TYC): Tyco is a pretty diversified company, although somewhat less so after breaking itself apart earlier this year. TYC still
owns ADT, an alarm services firm. Less turnover in housing, less new real estate being built, means less business for ADT. They also have a valve, safety and fire business — though these are more exposed to the commercial real estate market.
When cash on the balance sheet isn’t really there
Lastly, there is tremendous exposure in tech now for many tech firms on their own balance sheets given their cash and near cash holdings. I’ve spoken with a few firms (software firms in particular because they generate a lot of cash) that for an extra 100 basis points in returns, have been investing their cash balances in SIV type vehicles and are now impairing their cash. Value investors, be prepared to see some cash disappear as CFOs understand that not all money market-type investments are safe. Read IOI’s Katsman on this issue.
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