Inuvo Q1 Surprises – Stock Undervalued by at least 50%
Inuvo announced Q1 2014 earnings late last week and put up some eye-opening numbers. While the top line came in lighter than we expected at $10.1 million, the company was still able to produce net income of 3 cents per share, essentially the best bottom line reported by this company in years. Additionally, the report made it apparent that the company is making great strides towards accomplishing the strategic objectives stated several quarters ago of moving the company’s focus away from toolbars and towards its growing ad business for third party publishers and the development of its owned and operated mobile friendly websites and mobile apps.
The Partner segment delivered very strong margins and Inuvo management stated that the company was already experiencing an upward revenue trajectory for the quarter to date. Given that Q2 is already more than half done, such comments in addition to comments indicating technological enhancements that make Inuvo’s network more attractive to publishers of mobile apps should give investors confidence that this key segment is not only growing but hints that we might start to see an acceleration of this growth rate.
The company appears to have turned a corner on the transition of the ALOT business, with the company now predicting a complete replacement of the revenue previously earned by the ALOT toolbar with a more consistent revenue stream flowing from the ALOT websites. We see two reasons for shareholders to be extremely optimistic about this segment 1) the ALOT websites that target many of the most profitable verticals in online advertising have been live for a very short time to have already reached a level of revenue generation that it could replace that earned quarterly in 2013 by the toolbars and 2) the ALOT toolbar business still delivered $960,000 in revenue for the company, despite the company completely shutting down any expenditures to acquire new users .
We note that many of these O&O websites were only live for six months or less as of the beginning of the quarter just reported and thus it is logical to assume that there was very little of that ad revenue generated from organic (read “free”) traffic sources. In our experience, it often takes at least six and sometimes 12 months to start to see a measurable benefit from organic traffic (ie search engine indexing of content, links from other websites and organic sources) so the numbers we are seeing produced today are likely coming from 100% paid ad campaigns to drive traffic to those sites. While its great that the company is able to grow revenue profitably while undertaking such campaigns, this means that the higher margin payoff is still to come – when we start to see some contribution from organic sources which should be increasing in each quarter of 2014 as the content gets indexed by the search engines, picked up by directories and linked from other websites. Thus, it is likely that the ALOT O&O websites business will see margins expand if the company continues to grow this segment in the measured approach they have used to date.
While it is expected that the toolbar business will go away now that the company is no longer actively marketing the ALOT Appbar, we believe that Inuvo will profit from a longer “long tail” than investors or even management may dare to expect, as the ALOT appbar offers utility and convenience beyond most traditional toolbar products.
In summary, we believe the Q1 report was much better than what most expected following the less than exciting Q4 results. The Q4 numbers in addition to the dark cloud of a potential delisting (due to falling below minimum shareholder’s equity of $6m) caused Inuvo’s stock price to fall from its $1.20-$1.30 trading range to current levels. Thursday night’s Q1 report showed a marked turnaround occurred in Q1 and management’s comments evidenced a growing momentum in both segments, as revenue is obviously accelerating in the Partner segment and it is apparent that the O&O segment is trending towards higher revenue and improved margins. Additionally, the earnings achieved in Q1 pushed the company’s shareholder equity up to a level that exceeds the NYSE Mkt’s minimum requirements, which appears to remove the cloud of a potential delisting. Thus, the concerns that led to Inuvo stock price declines of 30 – 40% have been all but removed from the Inuvo story, but todays trading range still reflects that big discount. We believe this represents a major buying opportunity with the potential for a quick 50%+ gain over the next few months as investors realize what has occurred here and significantly greater upside for those taking the long term view. If the current momentum continues, it will be hard to make the case for a sub $2 Inuvo share price, a level that would allow a nice 150% gain from existing levels. As of this writing (10:30am edt April 28, 2014), Inuvo is trading at 80 cents per share and we believe this represents a tremendous buying opportunity.