Archive for February, 2013
We have received several submissions of ideas to be our #2 focus stock to replace Travelzoo. I am writing a note about one (AUGT) that we will not be our next focus stock and I am doing it because I think many in our community might want to buy shares anyway. The reason we are not making it the focus stock is it is kind of like the reason we are now longer focusing on Travelzoo in that we do not see a clear and direct way for our members to use their products in a way that could have a material impact on the company. That aside, AUGT is the picture of a stock we would buy and we think it has the potential to offer strong triple digit (100%+) returns over the next twelve months and possibly much sooner than that. The stock closed yesterday at $.291 and again touched the multi year low it had set the previous day. The stock has been getting murdered and it appears that investors/traders are throwing out the baby with the bathwater.
Here is the lowdown –
Augme Technologies (AUGT) owns HipCricket, one of the most significant players in the mobile marketing/advertising space. HipCricket has been on a tear growing over 15% sequentially and projecting this to continue for the forseeable future. HipCricket management has executed quite well in a space where the same can not be said for many of the larger players (Millenial Media, Velti), but its stock has been beaten down due to multiple dilutive stock offerings that were necessary to help the company fund an IP Litigation strategy built around its large stable of mobile and VOIP patents. While it appears there is the potential for substantial value to be realized from the patent portfolio, the company’s shareholders have experienced the difficulties that can come through the pursuit of the enforcement through litigation approach by a company that has an operating business that actually uses the patents. The company made a decision to refocus its resources on the fast growing HipCricket business and the founder of HipCricket will be taking over as CEO of AUGT as of tomorrow. AUGT was trading at 89 cents less than 50 days ago (January 9 closing price – $0.89), but saw its valuation destroyed as word of the last stock offering pushed the price down below 60 cents and resulted in the actual placement occurring at 49 cents on Jnauary 30. Since that time, the perfect storm has emerged to push AUGT down further as investors digested poor quarterly reports by two of the larger players in the space (MM and Velti), the departure of interim CEO Paul Hussey and the settlement of the company’s case with AOL for $650,000 (much less than many expected). As often happens with microcap companies, the decision by some significant holders to sell their stakes was met by more selling which begat more selling and the stock fells another 40%. AUGT has fallen 67% in the 50 or so days since reporting a very stellar quarter for the HipCricket business that was (as usual) overshadowed by the cash draining IP litigation, even though the company has now completed the restructuring it undertook to refocus its resources to grow the HipCricket business.
The market cap of AUGT now values the company at about half what it paid to acquire a HipCricket business that was less than half its current size at a time when the mobile marketing/advertising space was just beginning its meteoric growth stage. We believe there remains substantial value in AUGT’s core mobile patents that shareholders will ultimately benefit tremendously from them whether it be through a deal with an NPE to pursue licensing revenue or a buyout by a larger player seeking the protection and licensing revenue that could be achieved by these patents being in the hands of an owner with deeper pockets. In either case, AUGT is worth substantially more than its current trading price and we think investors at current prices will more than double their money over the next 6-12 months as the market begins to see the HipCricket for its true potential and the street gets a clearer picture of the value that will be realized from the patent portfolio.
Great news for Groove community participants and all Inuvo shareholders over the last 24 hours. Inuvo announced a renewal of their agreement with Google this morning, extending for two more years the partnership that allows Inuvo’s ALOT and Bargain Match services to offer best in class pay per click advertisements. This is a very big deal because only the highest quality producers of search traffic are allowed to offer the Google ad feed and because it typically monetizes any given sampling of search traffic at a significantly higher rate than the other major ad networks. It is also a big deal because Inuvo’s stock has declined over 30% the last six weeks in what appears to have been a sell off based on the theory that former CEO Peter Corrao’s departure was the result of a revenue shortfall in Q4 and what would prove to be the loss of the Google contract. Last weeks announcement of $16.2m in Q4 revenue took care of the revenue short fall issue and this morning’s announcement of the Google contract extension puts the other issue to rest.
Yesterday, Inuvo management announced that the company would be relocating its headquarters to Conway, Arkansas. The company is carving in the range of $2m (based on annualized run rate) out of its expense structure over the next 6 months by moving from New York City to Conway and the company has received a $1.75m grant from the Arkansas Economic Development Commission that will cover the cost of the move plus allow for additional capital investment in equipment to be used there. We believe this is a great example of the value new CEO Rich Howe’s entrepreneurial background will deliver for Inuvo shareholders.
Inuvo’s stock is still trading over 30% below the range it was trading before all the rumors about missing the Q and losing the Google contract started to abound. More recently, there has been much talk of the changes Google is requiring of its partners, particularly those who offer toolbars like Inuvo’s ALOT. This is actually a significant issue for many in the industry, as their aggressive practices that require consumers to “opt out” of having their home page, error search and browser search box defaults adjusted during the toolbar download process. Inuvo’s ALOT actually made the change to “opt in” that Google is requiring back in 2011, so this should not have an impact on Inuvo’s ALOT operations at all.
In summary, Inuvo has made major significant changes over the last 60 days that will have a very large positive impact on its cost structure and bottom line going forward. The company has renewed its Google contract and received a large grant to pay for the expenses associated with the company’s additional cost structure improvements over the last couple of days. The company’s overall long term prospects have improved significantly since early December when the stock was trading in the $1.20 – $1.30 range, but the stock is still trading below $1. We do not believe that will be the case for long and believe that Groove participants would do well to buy more shares while it is still this low.