Webxu Inc. (OTCBB: WBXU), is a performance media company that develops, owns and operates a network of branded consumer websites in categories marked by high consumer engagement and strong advertising spending. Operating in the digital media industry with companies like IAC/InterActive Corp (NASDAQ: IACI), Webxu appears to be significantly undervalued after unveiling its 2011 earnings release.

Webxu Ramps Up in 2011, Looks Ahead to 2012

Webxu announced very strong 2011 financial results a week ago, demonstrating that is has successfully ramped up its business. On a pro forma basis, net revenues for the fourth quarter of 2011 came in at approximately $4.7 million, which was more than double the $2.2 million seen during the third quarter, while its gross margins jumped from 32% to 34% over the same period.

Matt Hill, Chairman and CEO of Webxu, commented in their recent press release, “We are extremely pleased at the substantial progress we have made in the very short time since Webxu incorporated in 2010. In 2011, we took the company public, acquired and successfully integrated two businesses that provide a strong opportunity for organic growth, and delivered sequential quarterly growth. As we plan to continue our pace in 2012, we remain focused on successfully executing our strategic plan. Along with our organic growth strategy, we recently signed a LOI with a current strategic and synergistic acquisition that we expect to bring significant top and bottom line growth in 2012. We believe that we are well positioned to become a significant player in the digital media space.”

Webxu May be Significantly Undervalued

Webxu could be significantly undervalued based on both its growth and potential to generate free cash flow. With gross margins of around 31% all indications point to the company’s growth trends to continue. The chart below illustrates how we see the company trending for 2012.

Period	Revenue (Growth Rate)	Gross Profit (Gross Margin)	Annualized Net Income	P/E Multiple	Price per Share
Q1 2012	$5.3M (0.4%)	$1.56M (30%)
Q2 2012	$7.7M (15.9%)	$2.20M (31%)	$0.16	20x	$3.23
Q3 2012	$8.9M (16.5%)	$2.80M (31%)	$0.23	20x	$4.65
Q4 2012	$10.1M (58.8%)	$3.10M (31%)	$0.31	20x	$6.11

* Assumes sharply higher $4M in quarterly operating expenses and 21.1M shares outstanding.

In the model above, we assume that the company will grow modestly year over year, on a pro forma basis, before leveling out. Meanwhile, we assume that operating margins decline and price-earnings multiples even out at around 20x, which is a conservative assumption given that industry peer IAC/InterActiveCorp (Nasdaq: IACI) is at 16.03x and the industry average is at 25.03x.

A Great Investment Opportunity

Even with these conservative figures, Webxu appears to be significantly undervalued in the growing Internet sector at its market price per share today of $1.50. Successful execution of its business strategy over the next year could pave the way for a price per share close to between $3.23 and $6.11 per share by the end of 2012. This valuation could move even higher if it trades at a comparable rate to its peers.

WebXU (WBXU) Stock Quote and News:

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