Inuvo’s Stock Price and the Valuation Disconnect

October 18, 2012 at 12:01 pm Leave a comment

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:

http://seekingalpha.com/article/917091-local-corporation-s-valuation-next-to-peers-makes-it-an-obvious-opportunity?source=yahoo

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

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