Remark Media shares have been on a tear as of late, hitting new 52 week highs in each of the last two sessions and topping out today at $7 before closing at $6.95. The moves have also been on stronger volume, with today’s trading running at about 2x the normal daily average of shares traded. What could be behind the move?
We can think of several things -
1) Anticipation of breakout earnings – Remark’s operating business has long been viewed as secondary to its stake in Sharecare, but that could be about to change. The company has been on an acquisition spree over the last 12 months, acquiring Bikini.com to enter the lifestyle space and most recently adding additional heft to its growing financial media holdings. The last purchase extended the company’s holdings in the tax extension filing segment and will likely lead to a significant increase in transaction revenue. Additionally, its possible that investors are considering that the improvement in revenue shown in Q1 may lead to a similar (if not greater) show of strength in the Q2 report, especially considering that much of the company’s transactional and ad revenue are generated in the days leading up to the April 15 personal income tax filing deadline. Investors may simply be pricing in a very strong Q2 showing.
2) Anticipation of a Sharecare IPO filing – Remark’s shares have long been heavily impacted if not driven by news related to Sharecare due to Remark’s role in developing Sharecare and more importantly, its large holding of equity in Sharecare. All signs point to a Sharecare IPO filing in the near future and we would be shocked if it does not happen over the next few months. When it does, the very high profile nature of the stakeholders and the likely valuation range will surely bring a great deal of attention to Remark’s holdings and its status as the only way for the average investor to get a stake in such a high profile Initial Public Offering. This is in our estimation the most likely reason for the recent uptick in buying interest.
3) Additional acquisitions – Remark’s management has made some interesting moves over the last few quarters by acquiring and or licensing unique media assets. We have noticed that the company is increasing its use of stock in these acqusitions and have noticed a pattern over the last few years of the stock price increasing (perhaps on deal talk) in the days and weeks leading up to new deals. Is it possible that the company has another deal in the works?
The trading action over the last few sessions suggests us to us that some buyers are wanting to buy shares now. Patient buyers over the last few quarters could usually pick up shares of Remark at fairly significant discounts to the 52 week highs if they were willing to wait and buy on the bid. While the buyers of the past few days have picked up most of their shares on the bid, the bids have been very aggressive including today’s that started at the open with a bid higher than the previous day’s new 52 week high. It will be interesting to see if these recent buys are indicative of one of the three possibilities mentioned above or something else.
Inuvo reported prior to the market opening this morning that the company has received notification from the NYSE Market that it has regained compliance with all listing standards. This is a very big deal, as the stock had been beaten down to the 60 – 70 cent range from the $1.20-$1.30 range on concerns that the stock would be delisted. Despite good operational news, record earnings and and strong outlook, the stock has never been able to regain its footing due to that dark cloud. This morning’s announcement of official compliance apparently brought many investors back who had stayed on the sidelines to see if the company would regain compliance, as the stock rallied as high as $1.03 on volume of over 1 million shares. The stock closed up 4.71% at 89 cents after pulling back from the highs and we believe that this represents a tremendous buying opportunity. The negative catalysts that pulled the stock below $1 are no longer an issue for Inuvo and the company’s strong recent performance should result in more investors finding their way to the Inuvo story. The stock remains a tremendous bargain at any price below $1.00 and we think Groove investors would do well to buy as many shares as possible and tell your friends to do the same while INUV shares can still be had sub $1.00.
Inuvo announced Q1 2014 earnings late last week and put up some eye-opening numbers. While the top line came in lighter than we expected at $10.1 million, the company was still able to produce net income of 3 cents per share, essentially the best bottom line reported by this company in years. Additionally, the report made it apparent that the company is making great strides towards accomplishing the strategic objectives stated several quarters ago of moving the company’s focus away from toolbars and towards its growing ad business for third party publishers and the development of its owned and operated mobile friendly websites and mobile apps.
The Partner segment delivered very strong margins and Inuvo management stated that the company was already experiencing an upward revenue trajectory for the quarter to date. Given that Q2 is already more than half done, such comments in addition to comments indicating technological enhancements that make Inuvo’s network more attractive to publishers of mobile apps should give investors confidence that this key segment is not only growing but hints that we might start to see an acceleration of this growth rate.
The company appears to have turned a corner on the transition of the ALOT business, with the company now predicting a complete replacement of the revenue previously earned by the ALOT toolbar with a more consistent revenue stream flowing from the ALOT websites. We see two reasons for shareholders to be extremely optimistic about this segment 1) the ALOT websites that target many of the most profitable verticals in online advertising have been live for a very short time to have already reached a level of revenue generation that it could replace that earned quarterly in 2013 by the toolbars and 2) the ALOT toolbar business still delivered $960,000 in revenue for the company, despite the company completely shutting down any expenditures to acquire new users .
We note that many of these O&O websites were only live for six months or less as of the beginning of the quarter just reported and thus it is logical to assume that there was very little of that ad revenue generated from organic (read “free”) traffic sources. In our experience, it often takes at least six and sometimes 12 months to start to see a measurable benefit from organic traffic (ie search engine indexing of content, links from other websites and organic sources) so the numbers we are seeing produced today are likely coming from 100% paid ad campaigns to drive traffic to those sites. While its great that the company is able to grow revenue profitably while undertaking such campaigns, this means that the higher margin payoff is still to come – when we start to see some contribution from organic sources which should be increasing in each quarter of 2014 as the content gets indexed by the search engines, picked up by directories and linked from other websites. Thus, it is likely that the ALOT O&O websites business will see margins expand if the company continues to grow this segment in the measured approach they have used to date.
While it is expected that the toolbar business will go away now that the company is no longer actively marketing the ALOT Appbar, we believe that Inuvo will profit from a longer “long tail” than investors or even management may dare to expect, as the ALOT appbar offers utility and convenience beyond most traditional toolbar products.
In summary, we believe the Q1 report was much better than what most expected following the less than exciting Q4 results. The Q4 numbers in addition to the dark cloud of a potential delisting (due to falling below minimum shareholder’s equity of $6m) caused Inuvo’s stock price to fall from its $1.20-$1.30 trading range to current levels. Thursday night’s Q1 report showed a marked turnaround occurred in Q1 and management’s comments evidenced a growing momentum in both segments, as revenue is obviously accelerating in the Partner segment and it is apparent that the O&O segment is trending towards higher revenue and improved margins. Additionally, the earnings achieved in Q1 pushed the company’s shareholder equity up to a level that exceeds the NYSE Mkt’s minimum requirements, which appears to remove the cloud of a potential delisting. Thus, the concerns that led to Inuvo stock price declines of 30 – 40% have been all but removed from the Inuvo story, but todays trading range still reflects that big discount. We believe this represents a major buying opportunity with the potential for a quick 50%+ gain over the next few months as investors realize what has occurred here and significantly greater upside for those taking the long term view. If the current momentum continues, it will be hard to make the case for a sub $2 Inuvo share price, a level that would allow a nice 150% gain from existing levels. As of this writing (10:30am edt April 28, 2014), Inuvo is trading at 80 cents per share and we believe this represents a tremendous buying opportunity.
A quick note to update members of the Groove VC community on happenings with our two focus stocks, Inuvo and Remark Media.
Inuvo (NYSE Mkt: INUV) has had very little news flow or PR activity since our last update, but we expect to hear from the company soon with the release of its Q4 2013 results. As discussed previously, we believe the company will report a strong quarter in terms of its bottom line, though we do expect to see some contraction in the top line due to the holiday slowdown in web traffic that occurs each year leading up to the Christmas and New Years Day holidays and the impact that has on ALOT and other Inuvo owned web properties.
Remark Media (Nasdaq: MARK) has continued to be a mover and shaker, announcing late last month that the company has acquired taxextension.com. The tax extension business should be quite complimentary to its existing FileLater.com and Irs.com business and could not come at a better time, as most US consumers are starting to file their personal income tax returns. Remark shares have continued to climb and most recently have been in a trading range between $5.25 and $6.25.
Holders of Remark Media shares cannot help but watch the action in the IPO market with great anticipation, as investors continue to bid up the shares of just about every new issue that comes to market. The time for a Sharecare IPO filing has to be drawing near. We would be suprised if that does not occur over the next few months and shocked if it does not happen in calendar year 2014. When it does occur, we expect that Remark shares will get even more attention and have the potential to move even higher than its recent range due to its large stake in Sharecare. Adding fuel to that fire may be a broader movement in the marketplace in terms of valuations for health care related investments, as recent activity suggests that 2014 may see even greater capital flows into the space than the record flows into the space in 2013 -
GrooveVC community members should continue to benefit from operational growth at both Inuvo and Remark and hopefully some increasing investor awareness of the each’s growing business. Neither company has been very promotional thus far in 2014 and we hope to see that change as each has an increasingly good story to tell.
Things have been relatively quiet for Inuvo over the last month or so, with INUV stock settling into a trading range between $1.30 and $1.50. The fourth quarter has traditionally been one where we expect a slowdown in internet traffic – starting with a big boost due to the holiday shopping rush followed by an enormous drop-off in web usage during the last few weeks of each year. Given that Inuvo’s Alot portfolio has always been heavily dependent on traffic trends (both in their ability to produce revenue and in the company’s ability to acquire new users of its search products), we have no reason to expect that trend to be any different this year. I think much of the slowdown in the trading of Inuvo (and drop off in the price) is likely due to investors pricing in such a slowdown and the expected slow to no growth numbers that would come with it. While the company has remained tight-lipped thus far (no early release of top line production), we would not be shocked if Inuvo delivered a little upside surprise for investors in the form of a a stronger bottom line, perhaps even record earnings. The company appears to be shifting more of its efforts to addressing the exploding market for mobile advertising and we believe at some point the rising tide in that space is going to start showing up in Inuvo’s bottom line. We note that the impact of the company’s mobile pursuits has already started to have a big impact on the company in terms of revenue produced and it appears that the company may be ahead of the curve in terms of monetizaton strategies for its mobile properties. If the company’s mobile revenue grows at the same trajectory we witnessed in the second and third quarter, that increase against a backdrop of Q4 being the first full quarter of expense reduction savings since the move to Arkansas in Q1 may allow for a nice little upside surprise for Inuvo shareholders. If that turns out to be the case, we would not be surprised to see the stock trade to a new 52 week high, which would provide 50%+ upside in just a few months for investors buying in at today’s prices.
Remark Media Creates China’s First Boxing Channel – Launches With Distributorship of the Clash in Cotai
Remark Media announced last night that it has been named the official Digital Distributor of the Clash in Cotai boxing event headlined by Manny Pacquiao vs. Brandon Rios. Additionally, Remark Media also today announced that it is creating China’s first Boxing Channel, which will be distributed on PPTV’s platform. The Boxing Channel will feature live boxing events, documentaries, feature films, interviews, analysis and highlights from the boxing world. The Clash in Cotai is the Boxing Channel’s inaugural event. The Boxing Channel, as with PPTV’s other leading sports channels which exclusively distribute the English Premier League and the NFL, will feature a main lobby allowing viewers to browse and view on-demand content, as well as watch live events as they are broadcast. Remark Media is marketing the Boxing Channel and its live events broadcast on the channel via campaigns on Chinese social media Weibo and Weixin, incorporating celebrities, sports influencers, and cultural opinion leaders. The Boxing Channel is online at http://leader.pptv.com/boxing/.
The entire press release can be read by clicking here.
Remark is rapidly morphing into a significant player in several verticals and we believe this deal is an eye-opening example of their potential to find new and exciting ways to create value for shareholders. We should also note that any concerns about near term cash levels have been alleviated, as the 10Q filed by the company late last week included the following:
On November 12, 2013, Digipac, LLC notified the Company that it wished to convert the entire principal amounts of both the November 2012 Note and the April 2013 Note, and all accrued and unpaid interest thereon, into shares of the Company’s common stock, effective as of the same day. This conversion resulted in the issuance of 3,556,672 shares of the Company’s common stock to Digipac, LLC, and the extinguishing of a total of $5.8 million in debt issued by the Company and the approximately $281,236 in accrued and unpaid interest.
On November 14, 2013, the Company’s total cash and cash equivalents balance was approximately $2.7 million. On November 13, 2013, the Company entered into a $2.5 million Term Loan Agreement, at 6.67% annual interest rate for the first year and 8.67% for the second year, with a lender controlled by and in part owned by Mr. Kai-Shing Tao, the Company’s Chairman and Chief Executive Officer. The Term Loan Agreement is secured pursuant to the Term Loan Agreement detailed below, as amended by Amendment No. 2 to that Term Loan Agreement, dated April 2, 2013. The principal and accrued interest under the Term Loan Agreement is convertible into Common Stock of the Company at the rate of $3.75 per share, which was the closing price of the Company’s common stock on the date of entrance into the agreement. The balance is due November 2015.
Thus, the two prior convertible financings led by Remark CEO Kai-Shing Tao have now been converted into stock. While this conversion is dilutive to shareholders in that it increases the number of shares outstanding, it has zero impact on the public float and serves to further align shareholders interests with the Remark’s management. The new financing should have the same impact and management projects that this round should cover the company’s cash needs until the beginning of Q3 2014, a time frame which could allow for a liquidity event related to the company’s Sharecare stake. We believe these events will cause many new investors to take a look at the Remark story and considerable value being created for shareholders by Remark Media’s management.