Market Commentary: Undervalued Zombie with 41.6% Upside

Zombie companies are heavily indebted but continue to operate and service their debts, though usually they don’t pay them off. Because they’re so heavily indebted, small changes in interest rates can make them vulnerable to bankruptcy. So you might be wondering, why, in a rising interest rate environment they should even cross our radar.

Well, sometimes the valuations become so compelling that the reward-to-risk ratio becomes very appealing. That’s the case right now with comScore, the media and analytics company used by many leading brands to track consumer behavior (in order to help companies market better). Right now, comScore appears to be significantly undervalued with as much as 41.6% upside to fair value.

We’re going to investigate this apparent gem to see if it’s a diamond in the rough, or a Venus flytrap waiting to snare us.

Key Points

1. ComScore’s financials don’t seem too bad at first glance, with revenues up over the past two years, positive levered free cash flow, and a modest negative operating income.
2. The company faces challenges from the rise of ad-blocking software, the shift towards streaming, and competition from Facebook and Alphabet.
3. Despite the challenges, there is potential for comScore, including a healthy margin of safety and international growth through partnerships, but buying shares is a risky bet due to the changing media landscape and competition from better-positioned firms.

All That Glitters

As you dive down the comScore rabbit hole, you expect some downright ugly financials for a zombie company. But it doesn’t seem quite so bad at first glance. Revenues were up 2.6% last year and 3.1% the year prior. Gross margin sits at around 45%. Operating income is negative, but it seems modest at $20 million. And the company has debt of $56 million, not awful. And levered free cash flow were positive in 2022 to the tune of $33.8 million.

Moreover, a valuation analysis reveals a pretty healthy upside margin. Fair value, by our estimates, sits at $1.67 per share. Analysts are even more optimistic. They have a $2.44 per share target price.

But all that glitters is not gold and the bearish thesis on comScore should give prospective investors pause. A primary concern is the rise of ad-blocking software that prevents online audiences from viewing ads.

The tectonic shift towards streaming is a major threat to comScore too. While TV networks provide data to comScore to help them measure and track, streaming services like Netflix and Hulu are not so liberal with data sharing.

Perhaps the biggest threat of all to comScore is the massive budgets of Facebook and Alphabet, both of whom offer better digital tracking of audiences to more effectively serve ads.

The combination of these three factors has resulted in a starkly different media landscape versus a decade or two ago. And for comScore it’s akin to swimming upstream. The company lacks the financial resources to innovate at the pace of Alphabet or Meta, and the changing landscape is a headwind that stalls the firm’s revenue growth.

With all that said, comScore remains a leader in cross-platform tracking of media consumption. It has expanded its data offerings through a partnership with Nielsen, helping advertisers gain access to broader swaths of data. And its international business is on the rise – the company’s partnership with Kantar Media broadens its reach to China.

Is comScore a Buy?

There is lots to like about comScore. Valuation, international growth, new partnerships, and high analyst price targets are among the primary attributes. But make no mistake about it, buying shares of comScore is akin to swimming upstream. The currents in the form of the changing landscape of media are against the company. Other firms are better positioned to track users and serve ads more accurately to advertisers. As such, it’s a risky bet for any prospective investors.