The Evolution of Inuvo
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.