by Brenon Daly
Exactly a year after going public, RealPage on Monday evening announced its largest-ever acquisition. However, the $74m cash-and-stock purchase of MyNewPlace didn’t exactly go over with Wall Street as the property management software vendor might have hoped. The recently minted shares of RealPage dropped 11% on heavy trading, hitting their lowest level since just about a month after their debut.
The concern? The acquisition will lower earnings at the company, trimming non-GAAP net income at RealPage by more than $1m this year. Conscious of the dilution, RealPage opened the conference call discussing the deal in an almost apologetic tone, acknowledging that it paid ‘a lot’ for MyNewPlace. In fact, the purchase price of this latest transaction is only slightly more than RealPage paid, collectively, in its three previous acquisitions.
But on the other side, the deal positions the company to be more relevant in the lead generation part of the rental housing market, which is undergoing dramatic changes. During the call, the company estimated that it would take five years and an investment of $30-40m to build a business, internally, that would do what MyNewPlace does right now. So, RealPage billed the purchase as a play to be more relevant in the long term. After a year on the market, we would have thought that RealPage would already know enough about the myopic vision on Wall Street to not talk about delayed gratification from acquisitions.
I have to disagree w/you Brandon. RealPage is one of the more egregiously overvalued companies in the software sector. It’s a roll-up trading at over 5X sales and 52X 2010 earnings (and that’s even after the most decline!). When you reduce profit growth expectations even a little bit for a company trading at those nosebleed levels the stock will necessarily take a big hit.
To me the real wonder is why it trades at the level it does given the much lower organic growth numbers and lack of internal innovation. You can only fool the market for so long.
Hi Bill — always good to hear from you. And since you’ve been around the market for a few years yourself, you’ve seen a fair bit of mispriced equity in your time. (Maybe you even contributed to some of that mispricing in your prior life???)
But specific on RP: I’m not smart enough to know whether the co is overvalued/undervalued. I’m just explaining why it dropped on a day when the market rose 4%. You can tell me it’s teetering, that it doesn’t deserve its multiple and so on. But that was as true Friday (with shares at $23 and change) as it was Monday (with shares at $21 and change.) All I did was highlight the reason for the move, not whether it ‘should’ move.