Archive for December, 2012
Inuvo’s stock declined significantly yesterday due to uncertainty related to the departure of CEO Peter Corrao. It appears to us that Mr. Corrao did a masterful job of melding the operations of Inuvo and Vertro into a leaner machine that will reward shareholders handsomely in 2013 and yesterday’s sell-off was likely a knee-jerk reaction to his departure. It is not unusual for there to be some skittishness with the departure a top ranking officer at a micro cap company, but we think investors would do well to consider the context and understand that his departure is simply part of the evolutionary process that was envisioned when the two companies (Vertro and Inuvo) came together last year. It would be difficult to conceive of a reasonable rationale for a company the size of Inuvo to have two CEOs (what essentially has occurred since the merger closed), with two CEO compensation packages except for a transition period following a merger like this and we believe this change will be very positive for the company, shareholders and all involved.
While there has been much speculation (mostly of the message board variety) that Inuvo will report a poor fourth quarter, we do not believe that will be the case. We know that there is a great deal of seasonality to this business and that any business driven by search volumes will see a significant fall off over the last couple of weeks of the year. Given that it is the first holiday season for the combined operations of Inuvo and Vertro, former CEO Corrao was somewhat cautious when pressed in November on whether the company would achieve anything close to the sequential growth between quarters two and three, indicating at that time that the company expects to show sequential revenue growth only, being very clear that it would not be the strong double digit quarter over quarter growth achieved in Q3. Thus, the expectation for Q4 has been that Inuvo will achieve higher revenue in Q4 than they reported in Q3 and we remain confident that Inuvo will not only deliver increased revenue, but do so on a lower expense base.
The factors that lead us to believe this will occur are several. 1) when pressed (in the Q&A session following the prepared remarks) for his thoughts on Inuvo’s performance in October, Corrao stated simply in a word “fabulous”, suggesting that the encouraging trends established in Q3 had continued through the month of October 2) Inuvo’s PR following Black/Friday / Cyber Monday reflected more growth than would have been expected based on historical trends. While this in and of itself does not mean that November was “fabulous”, it suggests to us that the business was not going off a cliff in November. 3) anecdotal evidence suggesting strong growth for online shopping generally and this should translate to growth for Inuvo’s Bargain Match and ALOT services, which should offer a small lift over what was achieved in Q3 and add some cushion to make up for the big holiday season drop off we usually experience the last couple of weeks of December.
In summary, we believe the selling in Inuvo shares is overdone and that investors who buy shares at these levels will be rewarded richly in 2013. Under Mr. Howe’s leadership, we would not be surprised to see significant M&A fireworks in 2013 with the company either acquiring complementary assets in accretive deals or even the sale of the company itself at a hefty premium to its current trading range. Regardless of the ifs or whens of M&A activity, we expect that the stock will trade up significantly from current levels in the near future as evidence of the company’s flourishing ALOT and Bargain Match businesses brings more attention to the Inuvo story and the company’s combination of revenue growth and expense reductions brings more interest from analysts and institutional investors.
We received multiple notes from community members who have large gains in their INUV holdings and who are tempted to sell some of their Inuvo shares in the current $1.10 – $1.20 range. And we got notes from some who did sell some of their holdings in the $1.80 – $2 range last week. They ask – Should I sell now? Should I buy back in? The answer to each is the same. No way you sell at these levels. Buy, Buy more and tell your friends to buy too. As of this writing the stock is trading at $1.16. It is cheap. There is a reason the stock went up to $2+ on 20x normal volume. Deep pocketed investors want to own Inuvo stock. We believe they also saw a chance to bring the price back down to get more shares at cheaper prices, so they are trying to do that. What do they know that makes them want to own Inuvo stock so badly? Here are a few educated guesses –
1) Patent #8,321,269 – I am pretty sure most don’t know about this, but it is information that is publicly available and known by investors who comb the USPTO site for new IP gems. Late last week, Inuvo’s ValidClick was awarded patent #8,321,269 , which appears to be very broad and potentially has big implications for the big search and affiliate companies who are using some of these methods in their affiliate programs. Interesting to note, Inuvo’s predecessor company originally acquired the patent pending technology in a cash and stock deal in the $30 million range, which is more than the company’s current market cap ($27m). It took over seven years, but the patent was finally granted and on its face it appears to be very broad, potentially encompassing many aspects of online commerce (search, affilate commerce, etc.) and it appears that most of the larger players in the affiliate space are using methods that appear to be covered by this patent. The patent was just awarded last week and the company has not done a PR about it yet, so we will probably hear from the company on this next week. Rumors are already starting to swirl about the different parties that would want to buy the patent, buy Valid Click or even buy the whole company to get the patent. This should make owning the stock over the next few months even more interesting.
2) Bargain Match App Breakage – the way the new Bargain Match App is going to change the numbers for Inuvo is simply not reflected in the stock price. Most people who try bargain match like it, keep it and the company earns $10 – $30 over the next 12 months instead of $2 if they just got the Appbar. Consumers who download it and then quit using it before they earn enough to get that first $20 check, Inuvo gets to keep that money. Its called breakage. Inuvo will earn millions from this in the future, though they would rather conumers keep it and keep getting checks, because a check for $20 to a consumer means that Inuvo likely made close to $20 too, from this same customer that it previously hoped to make $1.50 – $2 from. Inuvo is acquiring these users in the normal course of its existing Appbar business and they are paying nothing extra to get them. Nothing, zero, zilch, nada. The marketing of this has been going on for a good 8 – 9 weeks now. Its going to provide a nice boost to the Q4 numbers. In 2013, it could make Inuvo into a different company entirely.
3) New Seeking Alpha Article – also publicly available (now) but not widely known 🙂 is that we are expecting to see a very bullish seeking alpha article published soon that will make a very compelling (if prior articles are any indication) case for Inuvo that explains why the stock could trade up to $5 within the next two years, a neat 4 bagger (homerun) from current levels. Prior results are no indication of future results, but it seemed that the last bullish seeking alpha article on Inuvo was very well received as the stock traded up close to 100% in the days following it.