Remark Media – Update – The short interest reported after yesterday’s close for Remark Media is now at the highest point since there has been a company called Remark Media with 225,000+ shares sold short. Given Remark’s tiny float and very smallish daily trading volume of 10-15,000 shares per day, this is actually a very significant short position and a situation that bears watching for several reasons –
1) Rumors abound that Sharecare may be about to file for an IPO. Some have them announcing as early as the conference where they are presenting today –
While we have seen nothing to substantiate the rumors of such an announcement, we are confident that Remark’s ownership stake in Sharecare will prove to be worth significantly more than Remark’s entire current market cap when an IPO does occur.
2) The launch of KanKan is imminent and the product’s consumer/social media focus has the potential to put Remark Media on many new investor radar screens – as a player in the social media space and potentially a play on the growth of that market in China.
We believe that Remark Media is significantly undervalued on a sum-of-the-parts analysis and that recent developments with roomlia, KanKan and Sharecare offer the potential for major upside as new investors become aware of the Remark story. We note that Remark Media’s shares are mostly owned by its management and a few institutions and that one of the largest holders (Ashford Management) has essentially doubled down on its Remark stake over the last quarter or so and now owns just under 10% of the company. The bottom line is that the float of Remark shares is very small and the thin trading volume allows for the stock price to move significantly higher with just a small uptick in demand and there are several events on the horizon that could cause such an uptick. This is not a stock that you want to be short at current prices and we believe that the speculators behind that relatively large 225,000 share Remark short interest are pretty brazen given the totality of the circumstances.
Inuvo – As we discussed in previous updates, Inuvo shares have moved higher and we expect to see it ultimately settle in a higher trading range following initiation of coverage by Zacks. We are pleased to note that as of this morning Inuvo is now trading at a new 52 week high north of $1.80. Despite this increase in the share price, we continue to believe that the shares are undervalued and that the Zacks coverage represents just the beginning of the Inuvo story finally beginning to gain recognition among investors. Beginning tomorrow, Inuvo will enjoy the benefit of gaining the exposure in the financial media that comes when a company’s stock achieves a new 52 week high and this is significant because we believe Inuvo’s performance over the last 18 – 24 months and valuation relative to its peers is a story that will continue to attract new investors. Inuvo’s stock price is moving higher without any new reported developments simply because the Inuvo story is starting to get discovered. This began with the Zacks coverage and the process will only quicken with the stock getting the exposure of hitting new 52 week highs.
The bottom line is that Inuvo is a great little mobile advertising growth stock that is undervalued relative to its growth potential and we fully expect to see the stock continue to trade higher. Inuvo is cheap below $2 and we do not expect that investors will have much longer to buy shares below that level.
Remark Media – Remark’s roomlia division announced a deal with Siteminder today that should allow the company to expand to most major markets in short order. We believe this is significant as the roomlia business has the potential to eventually be the largest revenue engine among Remark’s operating divisions. While investors will likely be focused on the IRS.com, Taxextension.com and Bikini.com businesses in the first half of this year, we will be surprised if roomlia is not on pace to surpass them both in terms of revenue production by Q2 of this year and deals like the one with Siteminder make this outcome even more likely.
Earlier in the month we mentioned our expectation that Remark would go to market to raise capital and for this reason we were less likely to be in a hurry to buy shares. Since that time, the stock has pulled back 20-25%, trading at times near 52 week lows in the $3.50 range before bouncing back to a trading range just over $4. While some weakness would be expected in the scenario where the company may be about to offer stock to raise capital, we believe that sell off is entirely overdone and we view any price below $4.50 to represent an excellent buying opportunity.
We have recently posted several updates on Remark Media that were very bullish and we maintain that long-term bullishness. However, we do believe that the company’s current financial position will require the company to raise money in the near term and this makes us take pause from a near term urgency to buy the shares. While we are not suggesting that Groove participants should sell shares at these levels (because the stock remains cheap and illiquid)) we will be watching to see if the company does a raise similar to prior placements – where the company took care to limit dilution to the degree possible. We believe that much of how such an offering will be received will (as always) be heavily dependent upon the terms and timing, but note that this opens up the possibility for near term weakness in the shares. Remark remains a great holding for the long-term, but those considering adding to their holdings or establishing a new position might want to wait and see because the stock could trade lower depending on the terms of the financing. If it does, we would view any such weakness as simply an opportunity to add shares or establish a position at a lower price.
1)Inuvo has been picked up by Zacks with an Outperform rating and a $2.30 price target. We believe this could be a big deal because it is the first national firm to pick up coverage of Inuvo in its history (previous analyst coverage has been by smaller, regional firms) and this is the highest price target in years. We have seen an immediate uptick the volume traded since the Zacks report was released and we will be surprised if we do not see the follow through take us to a higher trading range for Inuvo.
2) Rave shares continue to show strength as each selloff related to articles attempting to paint Rave as overvalued are met by heavy buying in the $11 range. With the turnaround at Pizza Inn (6% same store sales growth and what appears to be the continuation of that trend), Pie Five’s extraordinary store level economics (17% same store sales growth) and the openings of a new franchise or company owned store almost weekly, the Pie Five growth story gets better and better. As more investors are exposed to the opportunity in the fast casual pizza space, we believe more will begin to see Pie Five as one of the likely winners in the race to the top of the space and the resulting demand for shares will continue to push RAVE to new 52 week highs.
3) Travelzoo share continue to show strength and seem to have found a new trading range around $10 per share. We are aware of new institutional buyers as well as new attempts by institutional buyers to make contact with Travelzoo management, to no avail. Travelzoo management has not made any kind of public announcement in a very long time now and the silence is deafening.
It appears that Travelzoo has released an upgrade to its hotel booking engine. The new UI is intuitive, visually appealing and overall very impressive. We also note that there is a new field listed by most rates that we currently see that reads either “Travelzoo Rate” or “Travelzoo Deal”. This is very significant because the previous iteration did not specify “Travelzoo” deal because all rates listed were for a Travelzoo deal. Travelzoo is obviously building into this upgrade the ability to offer third-party inventory – something we believe could be a watershed event taking Travelzoo’s hotel booking service from irrelevant to transformative in its impact on the company’s financials.
To date the company has essentially offered a small sampling of hotels in what we would describe as the most competitive hotel markets in the country. This means that many Travelzoo members around the world who try to search for a hotel in their chosen destination each day get the message “Our Deal Experts are busy negotiating with hotels around the world, we haven’t gotten to (whatever city) yet”, which leaves an enormous revenue opportunity on the table. We believe Travelzoo could be about to announce an affiliate deal with Expedia or Priceline or incorporate a GDS connection (Sabre, etc.) offering agency bookings. believe that a white label affiliate agreement is the most likely. Regardless which option is chosen, we believe this has the potential to make a huge impact, as Travelzoo will instantly be able to offer a very competitive rate and product to the Travelzoo members searching in essentially any market where Travelzoo members would travel and likely earn a commission in the 10-12% range on each booking without incurring any additional overhead for handling phone calls, customer service or anything else related to those bookings. While 10-12% is much lower than the 15-20% the company earns on its own deals, the net when you consider credit card processing fees, the cost to service those guests, etc. the company’s 20% take gets knocked down to closer to 12-17% range. So the revenue earned is lower, but the upside is that the company can expand from its current inventory (sources say 1500 range) to over 25,000+ hotels in every city in the world. We believe the revenue impact of the attempted hotel bookings that previously resulted in a “not here yet” message will be greater than what the company has been earning on its own deals. The cost impact of adding all of that inventory is immaterial, it amounts to the programming required to integrate with the EXPE/PCLN API. On e of our privately held companies has done this for just a few thousand dollars and the cost to process and service the bookings produced will be very close to zero as the company providing the affiliate program usually covers these costs.
Another important thing to consider if a Priceline or Expedia affiliate deal is announced, it could significantly increase the likelhood of an outright acquisition of Travelzoo. We note that Expedia’s acquisition of Travelocity started as a very elaborate white label affiliate arrangement. Eighteen months into the deal, Expedia closed on the full acquisition of Travelocity. If Travelzoo does an affiliate deal, it could lead to it being acquired by its partner. More importantly, we think Expedia’s previous move to take down Travelocity might lead any other bidders who are on the fence to move in more quickly for the Travelzoo assets before its affiliate partner could buy them.
In summary, a Travelzoo affiliate deal with Priceline or Expedia is a potential game changer for two reasons –
1) We believe it could have a material impact on the company’s financials as early as Q2 of this year
2) We believe an affiliate agreement with either Expedia or Priceline could increase the pressure on potential buyers to move up their timeline for getting a deal done.
TZOO stock is trading up about 15% from where we added it earlier this month, but we still believe its valuation does not reflect the potential of the pivot we see underway or the potential for it to be acquired by a larger player at a significant premium.
Inuvo reported net income of $645,000 or $0.03 per diluted share for the fourth quarter of 2014 on Thursday. Revenue for the quarter was $15.5 million, compared to $11.4 million in the same quarter of 2013. Both the top and bottom lines reported by Inuvo for Q4 outpaced analysts estimates significantly. Most surprising to many (including many Groove members) was that the company was able to produce these results during a quarter where the legacy ALOT Appbar business contributed revenue that was immaterial and they did this during a quarter where many other similarly sized companies (Like LOCM) reported major hiccups due to traffic quality issues. Aside from not dealing with the financial hit of the chargebacks, etc. that typically accompany traffic quality issues, the company’s focus on acquiring and maintaining relationships with high quality traffic sources has really started showing up in key metrics like the amount of time consumers spend on each site, the number of pages they view on average. More importantly, the company also reported a 25% gain in revenue earned per click and significant improvements in organic traffic, with organic traffic to the ALOT Career site up over 800%, to the Living site up over 100% and organic traffic to the Health site up over 50%.
An interesting article was published yesterday through Seeking Alpha. The author wrote “INUV management seemed to dance and dodge around any questions that asked about guidance especially for the first quarter.” While we believe the author is right in suggesting we should not annualize the fourth quarter results, we have to point out that 1) He has obviously not followed Inuvo very long if he was surprised that management would not give quarterly projections (that has been standard with Inuvo management for as long as there has been Inuvo management) 2) He suggested that the fourth quarter has typically been the strongest, which suggests he was not following Inuvo as recently as 12 months ago and/or he also failed to look back to last year’s Q4 results before making that assertion and 3) he said to sell now which we think is a mistake.
The bottom line for Groove members – Inuvo beat even the most bullish projections on the top and bottom lines in Q4. We agree with the author that it would be risky to assume we should use that as a baseline and annualize it, but selling Inuvo at $1.40 range risks leaving significant capital gains on the table. We think the author will wish he had those shares back. The Q4 numbers were better than most well-informed followers of Inuvo expected. We find it surprising that the stock has continued to trade as low as it has in light of the company’s continued strong numbers quarter after quarter, but we remain very confident that the stock will eventually trade higher as the strength of Inuvo’s full year results and investor recognition that this management team is executing at a level that will eventually lead to a higher stock price.