QNST - QuinStreet's Fiscal Q4: Non-Insurance Successes And Stagnant Shadows

2023-08-11 09:00:21 ET

Summary

• QuinStreet, Inc.'s non-insurance market revenue has seen significant growth, accounting for three-quarters of Q4 revenue and increasing by 18% year-on-year.
• The financial services and home services segments have shown resilience, with non-insurance revenue reaching $367.4 million, a 26% increase from the previous year.
• CEO Doug Valenti expects sustained positive performance in the home services vertical and anticipates an uptick in auto insurance client expenditures.

Thesis

QuinStreet, Inc. 's ( QNST ) fiscal Q4 2023 earnings report showcases an impressive revenue of $130 million, beating expectations by $1.86 million, coupled with pronounced growth in non-insurance markets, accounting for 75% of the Q4 revenue. However, these successes were offset by a GAAP EPS of -$1.03 , missing estimates by $0.86. In the context of these mixed results, this analysis argues that the company's long-term growth prospects may be promising, particularly in the non-insurance segment, but there remain areas of concern such as the stagnant insurance side and potential overvaluation that warrant cautious investor scrutiny.

Company Overview

QuinStreet, Inc., established in 1999 and based in Foster City, California, specializes in online performance marketing, catering predominantly to the financial and home services sectors. With a presence spanning over two decades, the company facilitates customer acquisition across the U.S. and globally, leveraging both its proprietary websites and partnerships with third-party publishers.

QuinStreet's Fiscal Q4 2023 Earnings Highlights

In its recent Q4 report, QuinStreet's fiscal performance casts a spotlight on the unfolding trajectory of its non-insurance market potential. At the conclusion of this fiscal cycle, there's been a pronounced uptick in growth from non-insurance market avenues, amounting to three-quarters of the Q4 revenue. This represents a year-on-year growth of 18%.

Financial services and home services, both essential segments for QuinStreet, have manifested financial resilience. A closer examination reveals that over the fiscal year, the revenue stemming from non-insurance ventures was an impressive $367.4 million, marking an increment of 26% when juxtaposed with the previous year.

Diving deeper into the home services vertical, CEO Doug Valenti highlighted expectations of sustained positive performance. He elucidated the company's expansive strategy, referencing a dynamic growth pattern across various sub-verticals in home services — colloquially termed "trades." This might encompass domains such as roofing, HVAC, or windows. Valenti's commentary underscores QuinStreet's penetrative strategy: a more in-depth engagement with these trades, augmented client portfolios, enhanced budgetary commitments from established clientele, and broader media outreach powered by substantial budgetary allocations.

In terms of sheer financial stability, the firm concluded the year with a very healthy liquidity position, holding $73.7 million in cash and a clean slate with no bank debt. The adjusted EBITDA for fiscal 2023 stood at an impressive $16.7 million.

Moreover, a discernible uptick in auto insurance client expenditures is anticipated from January 2024 onwards. Valenti shed light on the auto insurance spectrum, emphasizing observed trends. He noted that in inflationary times, combined with a possibly mellowing economy or looming recessionary pressures, the propensity to shop for auto insurance amplifies. This trend is further accentuated as consumers face surges in renewal rates — with increments sometimes hitting formidable double-digit thresholds such as 10%, 20%, or even 30%. This propels consumers to broaden their search for competitive rates, which in turn funnels more traffic to platforms like QuinStreet, positively impacting their business metrics.

Projections for fiscal 2024 maintain this upbeat narrative. Revenue and adjusted EBITDA are both projected to exhibit double-digit growth rates. The current trajectory of the non-insurance business revenue, nearing a milestone of $400 million annually and recording an organic growth rate of 19% over the preceding three fiscal years, hints at sustaining its strong performance. The firm's adjusted EBITDA, in sync with this growth, is slated to accelerate even faster, potentially breaching the 10% margin.

Performance: The Dual Narrative

Analyzing the investment performance of a company over different timeframes can lead to contrasting narratives, as demonstrated in the case of QuinStreet. The divergent pictures painted by two distinct periods reveal how the optics of performance can shift dramatically depending on the window of observation.

Looking at the medium-term timeframe from July 2015 to August 2023 (see above), QuinStreet seems to tell a story of steady growth, nearly doubling the share price from USD $6.35 to USD $10.05. This appreciation represents a success story of sorts, even if the firm's performance lagged behind the broader market, as reflected by the S&P 500 Index (SP500).

However, a caveat to this positive trajectory is the firm's lack of dividends. Investors seeking income might see this as a disappointment, particularly when juxtaposed with the dividends provided by the S&P.

Fast-forward to a more recent window from July 2021 to August 2023 (see above), and QuinStreet's narrative shifts dramatically. The company's stock, starting at USD $18.55, plummeted to USD $10.05, a decline of almost 46%. This significant loss paints a sobering picture, with a negative annualized ROR of -25.26%. In this shorter timeframe, the absence of dividends becomes more than just a contention point; it accentuates the sharp contrast between QuinStreet and the broader market.

My point is that the stark difference between these two timeframes illustrates the crucial importance of context in investment analysis. An investor examining QuinStreet's performance over the medium or long-term might see a company that, despite some challenges, has managed to grow its share price. In contrast, an investor looking at the more recent two-year period would likely come to a much more pessimistic conclusion.

With that said, in the case of QuinStreet, the recent intraday surge of +17.13% on 10 August 2023 might hint at a potential turnaround.

Valuation

QuinStreet's price-earnings ratio (P/E) stands at a towering 72.91x, far above the normal P/E ratio of 47.45x (see chart below). This figure implies that investors are paying a significant premium for earnings. This elevation in the P/E ratio might be concerning to some investors, and rightfully so, as it may suggest overvaluation. However, I think it's important to underline that the company's adjusted (operating) earnings growth rate is 25.02%. This aligns perfectly with a P/E=G at 25.02x.

With a growth rate like that, coupled with yesterday's almost 20% price movement, and one could argue that QuinStreet is on an upward trajectory that may justify the elevated P/E ratio. But is this growth sustainable?

Risks & Headwinds

Analyzing Seeking Alpha's " Growth " factor grades for QuinStreet presents a mixed picture in terms of financial performance.

Its average C+ rating indicates a performance level that's mediocre at best, and this is further reflected in the Revenue Growth figures, with a Year-on-Year (YoY) grade of C- and a Forward ((FWD)) grade of C+. The modest difference of 27.35% in Revenue Growth ((FWD)) as compared to the sector median is not enough to paint a bullish picture.

Circling back to, the company's Q4 report highlights an adjusted net loss of $514,000 for the June quarter. While this figure alone might not be enough to raise alarm, it coexists with a one-time non-cash charge of $51.9 million, used to establish a valuation allowance against deferred tax assets. The company's management does not regard this as a negative, emphasizing that these deferred tax assets carry expiration dates well into the future and are anticipated to offset tax liabilities eventually.

Moving on, QuinStreet's full fiscal year 2023 revenue stands at $580.6 million, a figure that portrays no marked increase from the previous year. This lack of year-over-year growth emerges as another point of lackluster growth. Though the non-insurance segment of the business demonstrates promising vigor, the insurance side hints at stagnation. The absence of growth in this considerable part of QuinStreet's portfolio shouldn't be glossed over.

Lastly, QuinStreet's outlook for the September quarter, the fiscal Q1 of 2024, further compounds the financial story. With an expected revenue bracketed between $120 million and $125 million and an adjusted EBITDA that may only break even, the guidance does not sketch a trajectory of immediate and significant growth.

Rating: Hold

While QuinStreet showcases promising growth in its non-insurance segment and a strong financial position, there are evident concerns. The recent two-year stock performance has been abysmal, showing a decline of 46%. Their towering P/E ratio indicates potential overvaluation, and the mediocre growth ratings from Seeking Alpha, combined with the lack of year-over-year growth, add to the caution. The company's outlook for the next quarter also doesn't inspire immediate optimism. Although there's a hint of a potential turnaround from the recent surge, I think investors are better off monitoring QuinStreet, Inc.'s trajectory over the next few quarters before making a buying decision.

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