Falling Value of Babylon Shares Puzzles Investors

Until Tuesday's 8.5 percent correction, the stock had fallen 45 percent since July, even if it is trading on the Tel Aviv Stock Exchange at more than triple its value from a year ago.

One of the most puzzling questions troubling stock market investors lately is how much the shares of of the online translation company Babylon are really worth.

Until Tuesday's 8.5 percent correction, the stock had fallen 45 percent since July, even if it is trading on the Tel Aviv Stock Exchange at more than triple its value from a year ago.

It closed Tuesday at NIS 24.99, giving it a market valuation of just under NIS 1.2 billion.

After reaching a peak of NIS 41.88 in the middle of last July, reflecting a stock market valuation of almost NIS 2 billion, the stock went into a tailspin that only worsened in the last two weeks following the postponement of its initial public offering on Nasdaq.

A letter two weeks ago from partner Google ordering it to shape up in its working procedures didn't encourage investors either. As a result, Babylon's market cap is now south of NIS 1.2 billion.

"Everyone's selling, so we are too," an investment manager told TheMarker on Monday. "There are concerns that the stock might crash because of the canceled Nasdaq IPO, so we decided to be cautious."

"The market got a bit carried away," commented Shmoolik Keshet at Clal Finance. "There were worries over the cancellation of the Nasdaq offering, but aside from that, Babylon is now priced at a bargain."

Babylon's dependence on Google is a major risk - 84 percent of Babylon's revenues derive from its contract with Google, which expires in 2013 - and it accounts for some of the worry over the company's future. Google's recent reprimand of Babylon fueled market fears that the contract might not be renewed.

But last week Babylon CEO Alon Carmeli said he thought any likelihood of Google not extending the contract was quite slim.

The first nine months of the year, Babylon chalked up revenues amounting to NIS 470 million, jumping 3.5 times higher than for the same period last year, while net income registered NIS 68 million, nearly seven times the figure for the first three quarters of 2011.

The company posted net income of NIS 31 million in the last quarter alone and is headed toward exceeding NIS 100 million on the bottom line of its annual financial statements.

Based on growing Internet exposure for its online translation application, Babylon's 2013 profits should reach NIS 120 million to NIS 130 million, assuming the contract with Google is extended as planned.

This would give Babylon a forecasted price-earnings ratio of 9 based on its current share price, quite low compared with other Internet growth companies.

David Bachar
Haaretz