Analyst: Perion Shares More Compelling Following 'Shocking' Deal

• On Tuesday, Perion Network Ltd (NASDAQ: PERI) announced a surprising acquisition: the company paid $180 million for ad-tech firm Undertone.
• In a report issued Wednesday, Benchmark analyst Daniel L. Kurnos said the purchase “adds quality, legitimacy, stability and diversity” to Perion.
• The analyst reiterated a Buy rating and $6 price target on the stock. Shares were trading around $2.72 on Wednesday, up more than 13 percent.

According to Kurnos, the $180 million Perion paid for Undertone is "very reasonable" taking into account the latter's 15 percent revenue growth rate and 15 percent EBITDA margins, "even with minimal expected cost synergies (~$1 million)."

The merger provides Perion with some diversity, moving away from the Search vertical, which is expected to grow next year even though investors are far from loving it. While some aspects of the deal were not as attractive, Benchmark sees the acquisition with very good eyes and believes it could represent a potential inflection point for the company.

The report pointed out three key issues in the Undertone purchase:

• 1) "Undertone does not compete anymore in the standardized display market, with 15% revenue growth coming despite significant attrition in that remaining 20% of the business."
• 2) The company has been profitable since its very beginnings.
• 3) Perion paid under 10x EV/EBITDA and 2x EV/Revenue for a "mobile-heavy, differentiated product."

Having said this, the analysts envision potential cross‐sell synergies, both with Perion's supply and demand platforms – search and mobile, respectively.

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.