• Despite facing unprecedented economic headwinds in 2020, the company posted double-digit annualised earning power growth over the past two years and showed remarkable resilience through the worst of the COVID.
• I see the Hindenburg short report as largely a collection of glaring misrepresentations regarding J2’s management team and business fundamentals that detract from legitimate concerns regarding Chairman’s influence.
• Two years since the publication of my own original report and despite a slightly higher price, I believe J2 Global represents an even more attractive investment opportunity today than it did.
• Maintaining $200/share price target over 1-3 year time horizon.

This note is a follow-up to the report I published on J2 in 2018. For those who do not have access to the original report, here is a quick summary of the original investment thesis published in 2018:

J2’s track record at productively putting capital to work, places it in the same category as Danaher, Constellation Software, Jack Henry, HEICO, and other high-performance conglomerates.

Despite this impressive track record of earning power growth, not only is the stock trading at a significant discount to other high-performance conglomerates, it is trading at discount to the sum of its parts, creating what I view as a very compelling investment opportunity.

Based on my assumption of continued strong fundamental performance and eventual trading multiple re-rating my target price in 2018 was $200/share over 2-5 year time horizon (the stock at the time was $73.47/share, vs ~$80/share today).

This update is organized in three sections:

1. Fundamental performance highlights over the past two years. Despite facing unprecedented economic headwinds in 2020, the company posted double-digit annualized earning power growth over the past two years and showed remarkable resilience through the worst of the COVID induced recession.
2. Updated views on the investment opportunity. Two years since the publication of my original report and despite a slightly higher price, I believe J2 Global represents an even more attractive investment opportunity today than it did two years ago.
3. Hindenburg promotional short report review. I see The Hindenburg short report is largely a collection of glaring misrepresentations regarding J2’s management team and business fundamentals that detract from legitimate concerns regarding Chairman’s influence on the business.

Section 1: Fundamental Performance since the original report was published

In 2018, J2 Global reported Revenue and EBITDA of $1,207MM and $490MM respectively. As of Q3 2020 the company has generated trailing twelve months EDITDA of $580MM with mid-point guidance for full year 2020 of $600MM representing ~11% annualized growth.

Couple of comments on the figures above:

1. The company has been able to achieve double digit annualised earnings growth in a period that includes one of the sharpest economic contractions ever seen. (I will discuss company’s performance in the second quarter of 2020 later). I certainly did not anticipate the magnitude of COVID related slowdown when formulating my expectations in 2018, making company’s fundamental performance even more remarkable.
2. The company has reduced its share count by 5.5% over the past two years, with $150MM in stock buybacks in Q3 2020 alone. Should share price remain at current levels (around $80/share), we can expect the company to continue buying back stock and therefore expect per share figures to grow at faster clip than the headline EBITDA and free cash flow numbers.
3. 2020 will include only two months of recently closed RetailMeNot acquisition, and if we look at 2021 EBITDA (that I believe can exceed $700MM) the annualized EBITDA growth per share over a three-year timeframe will approach mid-teens.

It is worth pointing out that J2 had deployed relatively little capital on acquisitions in the first three quarters of 2020. So, the strong fundamental performance achieved over the first nine months of 2020 has largely been driven by strong organic performance of the individual business units and shows that even in absence of significant acquisitions J2 can deliver outstanding results.

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