Time to Buy Vertro Again

September 15, 2011 at 5:41 pm 2 comments

Several months ago, we wrote that Groove participants should take their Vertro investment off the table. Given the unknown impact of the changes to SERP pages required by Google following so closely on the heels of the bump in the road (link) Vertro experienced in Q4, it seemed to us that the risk of downside
in the stock outweighed the potential reward of holding it until we could see how the changes would play out. While it may still be another month or so before we know for certain the full impact of the Google changes, we believe that Vertro’s stock price has fallen so far (closed at $1.33 this afternoon) that the risk / reward ratio has now shifted and the price of VTRO now reflects a worst case scenario that is not likely to materialize. Additionally, we believe that several factors have worked to drive Vertro’s price much lower than it should be, in particular what we see as a general buyer’s strike, possibly some tax loss selling and definitely alot of misguided rumors being tossed about in various online investor forums. Each of these is discussed in more detail below:

1) General buyer’s strike until impact of Google changes is known – we have seen VTRO’s trading volume fall off a cliff, as potential buyers of the stock have had no incentive to step in to start buying. The average daily trading volume has fallen to about 20,000 shares per day vs. a trading volume of well over 200,000 shares per day when the stock was trading at higher levels. We believe last night’s announcement of the improving metrics for the new home page offering means that the tide has turned and/or that management has grown more comfortable that the impact of the SERP changes are known or knowable and believe this should give investors a reason to begin buying the stock again. It would be uncharacteristic of them to announce these new home page metrics without also updating shareholders if the overall impact of the SERP changes were trending differently than the 7 – 10% decline they indicated to shareholders on the Q2 conference call last month. This is a very positive development on two fronts – 1) this is considerably better than some of the numbers tossed around when the SERP changes were first announced, as some had suggested that the monetization rates might fall 20% or more. 2) it suggests what we have believed all along, that management has fine tuned this model to the degree that they are very effective at predicting how this business will be affected by such a singificant change and this lends even greater weight to their comments on the last quarterly conference call when they initially made the 7 – 10% prediction: that they fully expect the business to begin growing in the high single digit to low double digit range again beginning with Q4 of this year. Past results have shown a similar pattern, going back to 2009 when the company had some even that required them to reduce spending for customer acquisition and it generally took 2 – 4 months to recover and start to grow again.

2) Tax loss selling – September begins the annual ritual of fund managers selling their stocks that are down on the year to lock in a tax loss prior to their fiscal year end (many have year ending Sept. 30) Given that Vertro is now trading at its low for the year (closed at $1.33), it would not be a surprise to
see selling in September and this could have had some role in causing VTRO to fall as low as it has. While this could still be a factor over the next few weeks, we would expect the valuation to begin to cause potential tax loss sellers to look elsewhere for candidates to offset their gains.

3) Misguided rumors of a major drop off in traffic to Alot’s sites – the uncertainty of the situation with the changes required by Google opens the door for rumor and speculation to run rampant until the actual impact is known. Over the last few weeks, the message boards have been full of rumors about the huge
decline in traffic to ALOT sites. Adding fuel to the fire has been a Quantcast report that was posted and passed around that showed a substantial decline in traffic to the ALOT domain. However, investors should remember that these services are measuring traffic to a specific domain (Alot.com) and Vertro recently
made the decision to make changes to its home page service. As part of this change, traffic to its old http://home.alot.com URL has been rerouted to its new home page http://www.alothome.com More importantly, beginning in August Vertro’s marketing machine sent all new users to the new http://www.alothome.com
page instead of the old URL. As such, the traffic reports for the alot.com domain should show a small decline starting in August and bulding to a huge traffic decline by September However, if you run a report for the new http://www.alothome.com domain, you will see where most of the traffic went. Thus, we
know that traffic has likely declined due to the company carefully managing its advertising spend in light of the Google SERP changes, but traffic has not declined 65% like those traffic measuring services make it appear. We fully expect it to be down in the 10% range based on management projections of the
impact of the Google required SERP changes, but we believe that the stock price has declined over 50% since our last report and appears to be discounting a significantly worse outcome.

The bottom line – the Google required SERP changes will likely have a significant impact on VTRO’s operations. However, management has indicated that the the Google changes will likely impact their user valuation metrics somewhere in the 7 – 10% range and we believe that the company’s fine tuned marketing
machine and recent cost structure reductions will allow them to successfully navigate through these changes and start to grow again in the fourth quarter. Management has indicated that they intend to complete the transition to the new Appbar in all markets by the fourth quarter and expect the business to start growing in the high single digits/low double digits range again. Given that this return to growth is projected to start in just a few weeks, the company still has close to $5 million in cash in the bank and now trades at a level that values the company (ex cash) at just over $4 million, we believe Vertro
shares are a good buy and do not come close to reflecting the potential for this business model to regain its momentum (double digit quarter over quarter revenue growth rates) on top of a significantly lowered cost structure, potentially making the company even more profitable than it was when the stock was
trading north of $5.

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2 Comments Add your own

  • 1. john  |  January 3, 2012 at 9:34 pm

    Can the vertro/inuvo merger go through if Inuvo is delisted from Amex. More important should it ?

    Reply
    • 2. jwbuffett  |  February 6, 2012 at 10:29 am

      The merger could be completed if INUV were delisted but it is unlikely that the Vertro shareholders would vote to approve the merger if that occurred.

      Reply

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