Ancestry.com Shakes Up the Family Tree

There's always someone who messes up a family reunion.

Yesterday it was Wedge Partners lowering its earnings outlook on Ancestry.com (NAS: ACOM) after analyzing the leading premium genealogy site's recently tweaked pricing. The stock took a nearly 7% hit on the news more than 4 million shares in trading volume.

It's quite the stampede, and that was after trading much lower earlier in the day until a Bank of America analyst stepped in to call the downturn overdone.

In a nutshell, Ancestry.com bumped its monthly rates higher but provided better discounts on longer-term subscriptions.

This is actually a smart move for Ancestry.com, since a lot of new members go in with the intention of quickly scouring through the site's 7 billion records before moving on. They don't immediately realize that genealogy is a long-term pursuit and that even historical records are dynamic when it's a premium site that continues to beef up its content catalog. They don't initially appreciate that what begins as a curiosity-fueled path of self-realization actually has beneficial medical and legal implications.

This doesn't mean that Ancestry.com is simply trying to do its subscribers a favor by encouraging longer stays. The dot-com speedster can also afford to beef up some of its deteriorating metrics.

Ancestry.com grew nicely in its most recent quarter. Revenue climbed 36% and Ancestry.com's nearly 1.7 million subscribers is a 28% improvement over the past year. However, the service's monthly churn rate increased to a problematic 4.6%.

This may not seem like a high number. If fewer than one of every 20 subscribers is cutting you loose in any given month, you're obviously proving yourself as more than just a one-hit membership. Netflix (NAS: NFLX) is a market darling, and its monthly churn rate rose to a similar 4.2% during the same three months. Other popular subscription services including TiVo (NAS: TIVO) and Sirius XM Radio (NAS: SIRI) have substantially lower churn rates, but those offerings come with costly upfront hardware investments.

However, subscriber acquisition costs continue to climb at Ancestry.com, so it has to milk as much time -- and money -- from new subscribers as the market will bear. The pricing strategy is the right approach.

Ancestry.com is now trading at just 18 times next year's projected earnings, a steep discount to its recent growth rate. The market lull and a poor market reaction to its most recent quarter have created a buying opportunity that's difficult to ignore.

Here's hoping that things go smoother at the next family reunion.

If you want to see how the genealogy leader holds up against future attacks, addAncestry.comto My Watchlist.

At the time thisarticle was published Motley Fool newsletter serviceshave recommended buying shares of Netflix and Ancestry.com.Motley Fool newsletter serviceshave recommended buying puts in Netflix. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy. Longtime Fool contributorRick Munarrizcalls them as he sees them. He does not own shares in any of the stocks in this story, except for Netflix. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

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