Cyberplex.com (TSX:CX) is Canada’s largest CPA network with a fairly blue-chip customer base including RBC and Jaguar along with net giants like eHarmony and Netflix. They’ve been pretty aggressively growing revenues and earnings over the past couple years and for awhile I counted myself a shareholder. I sold my position last year when they announced their acquisition of Tsalvo (which was once upon a time Geosign). It was highly dilutive to shareholders (expanding the shares outstanding from roughly 80M to 120M+) and I’m not a fan of traffic arb plays because the earnings (while often explosive) are extremely volatile.

Case in point, yesterday after the bell Cyberplex warned that their Q4 forecast may come in soft because the recent integration of Bing into Yahoo’s search was having an unanticipated effect on their average revenue-per-click.

This is exactly what I mean when I talk about the hazards of this type of business model. As I once said on my favorite value investing forum:

Keyword arbitrage is the practice of buying up cheap keywords on one search feed (i.e. google) and the redirecting the traffic to your own web pages, or PPC feeds where you hope to convert enough clicks at higher payouts to make it profitable. I’m not a fan of the business model as you are constantly subject to the whims of entities external to you, namely the search engines you’re arb-ing. I’ve seen entire companies go up in a puff of smoke *overnight* after getting banned by google, for example, from doing this (anybody ever heard of Geosign?)

Although I was talking about banks.com at the time, there are similarities with Cyberplex’s situation and I also talked about this before: the risks of being at the mercy of the search engines.

Having said all that, Cyberplex has a saving grace, a big one. It’s got a viable CPA network and model.  I think will CPA eventually overtake PPC for online ad spending. I would personally prefer to spend my ad bucks on CPA over PPC any day of the week (that’s if I actually did any advertising). Cyberplex is establishing themselves as a prominent player in this space, in fact it’s the center of their business model, they’re cash flow positive (most of the time) and they’re not horribly over-leveraged (debt-to-current assets roughly 1:1.1).

Where I’m going with this is they may be worth a look at these levels. Today’s carnage was a massacre and these things often overreact to the downside. What may be happening here is that Cyberplex maybe undervalued now, especially if they stay cash-flow positive and just patiently rebuild the parts of their business that have been affected by this, while growing their core CPA network and business.

I’m going to be revisiting the most recent financials with an eye toward stepping back in, especially if this thing grinds lower over the next few days. There’s an old trader’s joke “My short term trade just turned into a long-term trade”, in this case the Cyberplex “growth stock” play may have just turned into the “Cyberplex contrarian value-stock”.