Is Wall Street paying you to buy Perion Network stock? (NASDAQ:PERI)

One of the worst stocks to own over the past 12 months (that still generates profits) traded in the US has been Red Perion Ltda. (NASDAQ: PERI), based in Israel. The company focuses on digital marketing initiatives, along with other operations that adapt the supply and demand of the online world.

Unfortunately for existing shareholders, the company has been bombarded by a series of operational problems, with one unit forced to close and others suffering for a list of reasons.

Sentiment on Wall Street has worsened so much that Perion is now priced close to the $400 million net cash-on-hand level. With a market cap hovering just below this figure, you can now, in theory, buy the company and all future profits for FREE. In effect, when you buy shares, you are exchanging cash in your brokerage account for cash on Perion's balance sheet.

So depending on how, when and if the operating business starts growing again, or what is done with the large stash of cash to boost shareholder value, the stock could quickly reverse higher over the remainder of 2024 or languish below $10 for the next 12 months.

Since a similar price/valuation relationship has occurred two other times in the past 20 years, with one an excellent buying opportunity and the other a nonstarter, readers will have to decide for themselves whether buying a position makes sense for their individual portfolio objectives and risk tolerances.

Personally I find enough positive aspects to put a Buy The company's stock rating indicates that some sort of bounce in price to $12 or even $15 (which would represent a sizable percentage gain from the current $8) could be in the offing. With massive selling volume and logical excuses to shy away from this name, the current shareholder base is likely to be one of the strongest. This means that any good news or better-than-expected operating earnings from the company could support a large imbalance between demand and supply of the stock. Simple economic theory teaches us that if buyers outnumber sellers by a ratio of 2:1 or 3:1, the price will have to rise to find new supply for transactions.

Let's review some of the arguments for and against Perion's ownership.

The problem child

Initially, the shares were hit hard by the decision of Microsoft (MSFT) will change the way it pays Perion based on Bing search revenue. The decision was then made to remove all identifiable MFA from searches (clickbait type websites nicknamed Made for advertising), which included a Perion unit that accounted for 5% of revenue, according to management. With the bad press and the insinuation of shady practices, Perion immediately shut down this unit. You can read more about the situation in an excellent article by analyst Henrik Alex here.

Combined with a slowdown in its overall AdTech business, the hit to the company's reputation has led to a large downgrade in guidance by management for the remainder of 2024 and 2025, along with a monstrous -70% stock sell-off beginning in August 2023.

The operating performance disaster for 2024 can be reviewed below, with analysts expecting little relief in 2025.

That’s not to say the company can’t bounce back. Several of its ad-based tracking divisions are growing rapidly in 2024. I’ve taken a few slides from its Q2 2024 earnings presentation to illustrate this reality below.

The history of undervaluation

Below is a basic chart comparing Perion's tangible book value to the stock market capitalization, using the current share price multiplied by the number of shares outstanding. Note that the price has almost always traded above the tangible book value, since 2006.

Even more interesting is the calculation of enterprise value. The average US stock value almost never trades at a “negative” enterprise value (equity value + all debt – cash holdings), but this is the third time in twenty years for Perion. I have circled the two previous cases in gold below (late 2008 and late 2013).

In YCharts below, you can see negative EV to EBITDA and Revenue figures on a logarithmic scale. You are essentially buying the company for free if earnings, cash flow, and overall cash levels increase in the future. Typically, negative enterprise value setups are reserved for companies reporting large revenue losses, with similar results expected indefinitely.

How did the company's stock react after the two previous drops in EV prices below zero? I've graphed the results below. The first occurred in late 2008, during the Great Recession. This situation turned out to be a great buying opportunity, as the price rose from $7 to $31 over the next nine months. However, the second example, in late 2013, didn't work out as well. Prices around $32 would see a small jump to $41 months later, followed by a price drop to $16 by the end of 2014.

Seeking Alpha's computer scoring system gives Perion an “A+” Quantitative assessment grade Today, this is largely a function of the ultra-low EV calculation. Bullish price-to-book comparisons are also part of SA’s equation. Plus, earnings from 6-12 months ago are still being counted against a rather bleak immediate revenue prediction from management. Still, if sales and earnings hold up in 2025, $8 per share could be an incredible bargain in retrospect.

Final thoughts

The bearish trader has a larger short interest position than he did a few years ago, but 3% of positions outstanding is not a surprising size. There is no massive short-covering pool that will push the stock much beyond $15 or $20 in the near future. I will add that I don't think it makes rational sense today to sell the stock at $8 near net cash levels.

The reason I am writing this story revolves around the chart pattern. Perion price has been trading above its 50-day moving average on and off for a few weeks now. Often, this action encourages buyers to step in and sellers to increase limit order prices. Therefore, the time for a bounce from its lows with the potential for a sizable retracement of significant losses since February may be near.

Other positive aspects include a much lower unemployment rate. Average directional index and green 20 days Chaikin Money Flow readings from the last month. Both may indicate that the worst of sales is over. In addition, Volume in equilibrium The figures bottomed out at the end of June (marked in blue below).

What are the risks of owning Perion at a negative enterprise value? My simple answer is that there cannot be substantial operating losses. If the company continues to see sales plummet and revenues turn sharply negative, cash holdings will be reversed.

Management could also do something stupid with the $400 million in cash, such as acquiring a similar company that isn't generating profits. Trading over $20 million in cash investment performance annually for something worse would encourage me to sell any future positions in Perion and run.

In terms of upside technical targets, I think a gap-filling of the price around $12 and then between $14 and $22 is possible, provided sales stabilize and the company can generate cash levels from here. A rally to $16 or $17 would generate roughly double your investment capital (+100%), by buying shares around $8.

And, if things don't improve in 2025, the slow cash burn should allow investors to walk away with $5 or $6 per share. As a result, I think the risk/reward equation is tilted in favor of the bulls. I rate Perion Network stock a 10. Buyand I will try to add a stake to my diversified portfolio next week. If there are quick trading gains before the end of the year, I will probably withdraw some, if not all, of the money I have in this company's name.

Thank you for reading this article. Please consider this article as the first step in your due diligence process. It is recommended that you consult with a registered and experienced investment advisor before entering into any transaction.