Archive for October, 2012
An interesting article about Local.com (LOCM) was published by Seeking Alpha late last week, where the author argued the reasons he felt that LOCM was undervalued. Without going into all of the details here, one of the key arguments was relative valuation, where he posted a chart of companies in this space and ranked them based on their market cap as a multiple of their trailing twelve months revenue. The list included 15 companies, many much more high-profile names like Value Click (Nasdaq: VCLK), Demand Media (NYSE: DMD) and Yelp (Nasdaq: YELP). The author argued that LOCM’s shares were very cheap, pointing out that it was very near the bottom of this list because its market cap was not a multiple of its revenues, but rather just a fraction of it. LOCM’s market cap equaled only .6x its trailing twelve months revenue vs. an industry average of 2.5x. Here is a link to the article:
Take a close look at that chart and notice the company at the bottom of that list, the company in this space that is actually the cheapest. Inuvo was trading at just .4x its trailing twelve months revenue, which brings up a couple of points Groove members should consider –
1) Even after the spike in Inuvo’s stock price the last few days that brought it up to its current range ($1.10 – $1.25), that would still only equate to a multiple of .56x its trailing twelve months revenues, meaning that at Friday’s closing price of $1.20 per share, Inuvo is still tied for the cheapest among the companies in the space and still cheaper than LOCM.
2) The revenue side of that multiple was based on the trailing twelve months and Inuvo’s revenue will likely be significantly higher over the next twelve months than that chart reflects if current trends continue and this rate of growth will likely be much substantial in percentage terms than most of the other companies on that list. Thus, Inuvo is really cheaper than it appears to be on that chart.
3) If you applied the industry average multiple to Inuvo’s revenue, it would equate to a stock price north of $5 per share.
A member of our community sent me a message on Friday afternoon when the stock crossed over $1.05. He is an investor who was blessed to have been contacted by one of our other members who was practicing the “tell your friends” part of the strategy (Buy the stock, use the company’s services, show your friends and associates how to join us and do the same) and he had quite fortuitous timing, in that he made all of his INUV purchases in the 60 cents per share range. This new participant in the Groove community wanted to know if he should take some profits given the significant increase (in percentage terms) in Inuvo’s stock price since his purchase. I told him quite simply – “absolutely not”. While the stock may be up substantially from where you bought it, it is still cheap by most measures, investors are only just beginning to discover the Inuvo story and the company’s operations appear to be hitting on all cylinders. Why take a 45 cent gain today when a few months patience will likely allow you to make this same decision with the stock trading at $2 per share or more? The move up in Inuvo’s stock price over the last few months (particularly the last few weeks) is unusual in that its rare to see a stock move up (in percentage terms) that quickly, but what many investors may not realize is that this stock went down in that same way on very little to nothing in the way of bad news and it did this on relatively low volume. We believe that the move up is really only correcting the valuation disconnect that had occurred following the merger, when investor apathy and what appears to have been a misunderstanding by many when Inuvo was reporting revenues only for the segments owned for the full quarter in which the merger was completed. Regardless, Inuvo’s stock has regained much of that lost ground now, yet it still does not reflect a valuation on par with its industry peers as the article above makes very clear.
The bottom line is that Inuvo’s stock is still cheap even in the current ($1.15 – $1.25) trading range. We fully expect this stock to get the added exposure of being on the list of stocks that are hitting new 52 week highs repeatedly over the next few weeks and months as the strength of the new Inuvo becomes more apparent and the Inuvo story becomes more widely known. Thus, it is still a good time to introduce friends and associates to the Inuvo story, so they can benefit from their own web surfing and shopping too. Buyers at today’s prices should still be able to double their money in less than a year if they simply buy the stock, use the ALOT Appbar/Homepage for web surfing and the Bargain Match shopping tools and show friends and associates how to join us. Don’t forget to walk them through the first steps – http://www.groovevc.com/firststeps.html
Travelzoo pre-announced revenues and earnings that were below the range most investors were expecting for Q3,causing the stock to fall 15% below it closing price on Thursday. Travelzoo CEO Chris Loughlin said the company remained positive about its long term growth strategy and gave strong indication that Travelzoo would be moving much more heavily into the hotel booking side of the business, by either developing or acquiring a hotel booking engine. He also mentioned that the company was in in negotiations to acquire a hotel booking website. We view this as an extremely positive development, given that the core earnings growth of all the major players in the online travel space have been impacted heavily by their ability to take hotel reservation market share. I can remember when Priceline’s stock cratered and was left for dead, even though the company had tremendous name recognition,technology assets and tens of millions in travel booking revenue. However, that revenue was mostly generated by very low margin airline ticket sales and the company was nowhere near profitable. Then the company acquired Travelweb for its hotel booking platform and adjusted the company’s resources to focus on the lodging sector and the very large margins available through wholesale lodging bookings. The company turned the corner to profitability very soon after entering the wholesale lodging space and began to acquire many of the top international players (Active Hotels, Bookings.com, etc.). The rest is history as the stock went from about $15 to its near $600 range today. In short, we certainly view the revenue shortfall as a near term negative, but we have long wondered when Travelzoo would make the move to focus on the hotel/lodging space like Priceline did to better leverage the value of the Travelzoo name and its enormous subscriber base. While it may be a 2013 story, we think Travelzoo is moving in the right direction and while the stock may be volatile for a few months during this transition, shareholders will benefit tremendously if the company is able to execute its strategy of refocusing its resources on the hotel/lodging reservation business. Often we encourage community participants to “double down” if one of our focus stocks trades significantly lower than our introduction price. We are not now recommending such a move for Travelzoo even though it is trading significantly lower. We believe the stock still has significant downside risk, particularly in the event of a large acquisition if it is not widely believed to be immediately accretive.
A key understanding that some new INUV investors may not appreciate about the ALOT business that was acquired in the merger with Vertro is the tiered structure of Google Adsense contracts. The ALOT Appbar, HomePage and search businesses are monetized through the Google Adsense program, where Google pays partners like Inuvo’s ALOT a certain percentage of the click revenue generated from each click on an ad served with search results on their websites. We have discussed this in the past with the understanding that this revenue share can be as high as 75 – 80% flowing through to ALOT/Inuvo. However, the percentage of revenue shared with ALOT is determined by the volume produced on a monthly basis. Thus, ALOT may receive a lower percentage (70%?) of the revenue clicked if they produce $1 million in revenue for Google, but they might get paid a higher percentage (80% range?) if they produce $3 million in click revenue. Of course, these percentages are never disclosed, but we can ascertain the range from filings by companies with similar contracts and anecdotal evidence that it is most likely in this range. So we are using these numbers as an example only, but investors should understand that ALOT/Inuvo can earn a significantly higher percentage revenue share when the company is producing at a level that exceeds these breakpoints as measured each month.
While the company does not publish such aspects of its contract with Google, we have compared quarterly revenue reports where management indicated they did not achieve the higher tier vs. those quarters that they did achieve the higher revenue tier and deduced that this higher tier kicks in somewhere in the $3m range as measured on a monthly basis. If we apply our estimated 75 – 80% revenue share to the $3 million total revenue generated, this would put ALOT/Inuvo’s reportable share of that revenue in the $2.25m – $2.4 m range at the $3m tier. While Inuvo management did not break out the monthly revenues between the ALOT products and Inuvo’s ValidClick/Publisher Network in the recent monthly update press releases, we know that the ALOT revenues accounted for about 42% of the overall revenue generated in Q2 and management indicated that much of the growth they reported in August was driven by strength in ALOT’s performance. So, if assume that ALOT revenue could be as much as 50% of the reported August revenue figure, it would mean that ALOT has likely achieved the higher revenue sharing tier in August. We believe that is the case and this could indicate a better revenue figure for the quarter than many are expecting, as the company earns a higher percentage payout on any given click of an ad and note that this has a tendency to snowball, pushing each month going forward to a higher level, as the increased earnings translate into an ability to spend more to grow the user base and revenues at an accelerating rate. The ALOT Appbar business should benefit even more in Q4 as this snowball-like momentum will likely allow the company to achieve the higher revenue share tier in all three months of the fourth quarter.
Sept.30 – We hope that participants of the GrooveVC community took the opportunity to “back up the truck” and fill their coffers with Inuvo shares since our last update. As we discussed in our last update, Inuvo’s stock has remained largely below most investor’s radar and it appears that the company’s recent announcement of a significant uptick in revenue has brought some new buyers into the fold. This announcement released the first week of September has apparently caused some investors to begin establishing positions or adding to existing positions, as the stock has rallied from the new 52 week low set in early September to Friday’s close of 73 cents per share. While we can certainly appreciate that a percentage move of that size in such a short time often results in some consolidation before the stock moves higher, we believe that Inuvo’s stock had been beaten down so much due to investor disaffection and/or apathy that we might not see the kind of pullbacks that often follow such a move.
Regardless whether a pullback occurs, we think that Groove participants should avoid focusing on short term price movements in the stock and instead recognize that Inuvo is only just now reaching the place where investors will be able to see the results of the company’s merger with Vertro showing up in the company’s reported results. While Q2 did include revenue from the operations of the old Inuvo and the old Vertro, we believe that the benefit from the merger’s expense reductions and management’s ability to create value from this combination will be much more apparent in Q3’s results and that investors will see this impact even greater in Q4. Inuvo’s stock remains a bargain at these levels, as we believe the current valuation does not come close to reflecting the potential of Inuvo’s businesses. We believe that investors who are buying at these levels will enjoy substantial gains over the coming quarters as Inuvo’s operations gain further traction and other investors begin to recognize the potential here. The time we have between now and the reporting of Q4 results should be used to buy more shares and introduce the Inuvo story to other investors who can buy shares, download the ALOT appbar, download the Bargain Match browser extension and use Inuvo’s local search offerings (Yellowise or Alot Local) for their daily searching, online shopping, etc.
For those of you who are new to the GrooveVC community and/or Inuvo story, we will have a series of posts by community members over the next few weeks designed to highlight many of the overlooked or under-appreciated aspects of Inuvo. Stay tuned!