Archive for February, 2015
It appears that Travelzoo has released an upgrade to its hotel booking engine. The new UI is intuitive, visually appealing and overall very impressive. We also note that there is a new field listed by most rates that we currently see that reads either “Travelzoo Rate” or “Travelzoo Deal”. This is very significant because the previous iteration did not specify “Travelzoo” deal because all rates listed were for a Travelzoo deal. Travelzoo is obviously building into this upgrade the ability to offer third-party inventory – something we believe could be a watershed event taking Travelzoo’s hotel booking service from irrelevant to transformative in its impact on the company’s financials.
To date the company has essentially offered a small sampling of hotels in what we would describe as the most competitive hotel markets in the country. This means that many Travelzoo members around the world who try to search for a hotel in their chosen destination each day get the message “Our Deal Experts are busy negotiating with hotels around the world, we haven’t gotten to (whatever city) yet”, which leaves an enormous revenue opportunity on the table. We believe Travelzoo could be about to announce an affiliate deal with Expedia or Priceline or incorporate a GDS connection (Sabre, etc.) offering agency bookings. believe that a white label affiliate agreement is the most likely. Regardless which option is chosen, we believe this has the potential to make a huge impact, as Travelzoo will instantly be able to offer a very competitive rate and product to the Travelzoo members searching in essentially any market where Travelzoo members would travel and likely earn a commission in the 10-12% range on each booking without incurring any additional overhead for handling phone calls, customer service or anything else related to those bookings. While 10-12% is much lower than the 15-20% the company earns on its own deals, the net when you consider credit card processing fees, the cost to service those guests, etc. the company’s 20% take gets knocked down to closer to 12-17% range. So the revenue earned is lower, but the upside is that the company can expand from its current inventory (sources say 1500 range) to over 25,000+ hotels in every city in the world. We believe the revenue impact of the attempted hotel bookings that previously resulted in a “not here yet” message will be greater than what the company has been earning on its own deals. The cost impact of adding all of that inventory is immaterial, it amounts to the programming required to integrate with the EXPE/PCLN API. On e of our privately held companies has done this for just a few thousand dollars and the cost to process and service the bookings produced will be very close to zero as the company providing the affiliate program usually covers these costs.
Another important thing to consider if a Priceline or Expedia affiliate deal is announced, it could significantly increase the likelhood of an outright acquisition of Travelzoo. We note that Expedia’s acquisition of Travelocity started as a very elaborate white label affiliate arrangement. Eighteen months into the deal, Expedia closed on the full acquisition of Travelocity. If Travelzoo does an affiliate deal, it could lead to it being acquired by its partner. More importantly, we think Expedia’s previous move to take down Travelocity might lead any other bidders who are on the fence to move in more quickly for the Travelzoo assets before its affiliate partner could buy them.
In summary, a Travelzoo affiliate deal with Priceline or Expedia is a potential game changer for two reasons –
1) We believe it could have a material impact on the company’s financials as early as Q2 of this year
2) We believe an affiliate agreement with either Expedia or Priceline could increase the pressure on potential buyers to move up their timeline for getting a deal done.
TZOO stock is trading up about 15% from where we added it earlier this month, but we still believe its valuation does not reflect the potential of the pivot we see underway or the potential for it to be acquired by a larger player at a significant premium.
Inuvo reported net income of $645,000 or $0.03 per diluted share for the fourth quarter of 2014 on Thursday. Revenue for the quarter was $15.5 million, compared to $11.4 million in the same quarter of 2013. Both the top and bottom lines reported by Inuvo for Q4 outpaced analysts estimates significantly. Most surprising to many (including many Groove members) was that the company was able to produce these results during a quarter where the legacy ALOT Appbar business contributed revenue that was immaterial and they did this during a quarter where many other similarly sized companies (Like LOCM) reported major hiccups due to traffic quality issues. Aside from not dealing with the financial hit of the chargebacks, etc. that typically accompany traffic quality issues, the company’s focus on acquiring and maintaining relationships with high quality traffic sources has really started showing up in key metrics like the amount of time consumers spend on each site, the number of pages they view on average. More importantly, the company also reported a 25% gain in revenue earned per click and significant improvements in organic traffic, with organic traffic to the ALOT Career site up over 800%, to the Living site up over 100% and organic traffic to the Health site up over 50%.
An interesting article was published yesterday through Seeking Alpha. The author wrote “INUV management seemed to dance and dodge around any questions that asked about guidance especially for the first quarter.” While we believe the author is right in suggesting we should not annualize the fourth quarter results, we have to point out that 1) He has obviously not followed Inuvo very long if he was surprised that management would not give quarterly projections (that has been standard with Inuvo management for as long as there has been Inuvo management) 2) He suggested that the fourth quarter has typically been the strongest, which suggests he was not following Inuvo as recently as 12 months ago and/or he also failed to look back to last year’s Q4 results before making that assertion and 3) he said to sell now which we think is a mistake.
The bottom line for Groove members – Inuvo beat even the most bullish projections on the top and bottom lines in Q4. We agree with the author that it would be risky to assume we should use that as a baseline and annualize it, but selling Inuvo at $1.40 range risks leaving significant capital gains on the table. We think the author will wish he had those shares back. The Q4 numbers were better than most well-informed followers of Inuvo expected. We find it surprising that the stock has continued to trade as low as it has in light of the company’s continued strong numbers quarter after quarter, but we remain very confident that the stock will eventually trade higher as the strength of Inuvo’s full year results and investor recognition that this management team is executing at a level that will eventually lead to a higher stock price.
We believe that Remark Shares may be poised to move materially higher in the near term. The catalyst for this move will be the confluence of several factors but primarily driven by the completion of the “Project Dragon” that we now know to be the KanKan social media aggregation app, its launch in China and the announcement of partnerships with Alibaba (Nasdaq: BABA and Tencent (Nasdaq: TCTZF).
Though the company has been as quiet about the development of this project as SEC disclosure requirements allow, we believe it has the potential to be a game changer for Remark and note that they have invested significant resources into the development of this app. KanKan is designed to address the issue of social media fragmentation – where the popularity of multiple social media networks causes challenges for those whose preference for different networks makes it difficult to stay connected with each other. Kankan is essentially a “super meta network” that crosses all boundaries by connecting the various social networks from both a front end and back end perspective. Thus, a Chinese Weibo user can friend an American Instagram user and interact as if they are on the same network. Kankan will be able to connect users from all major social networks in China, US, South America and Europe. Launching first in China, users will eventually be able to seamlessly interact with users of Tencent QQ, Sina Weibo, Instagram, DaZhong DianPing, Douban and other social media platforms as if all were part of the same service.
Against the backdrop of what will likely be a surge in exposure for the Remark Media story generally due to the release of KanKan, we note that a surprisingly large short interest (nearly 150,000 shares) has developed. It appears that the short sellers began to build this position in mid to late October of last year. The short interest has grown each month since then and we have seen the stock price fall from the $6.25 range down to the low 4’s as this short interest grew nearly 500%. While 150,000 shares is not particularly large for the typical Nasdaq listed company, Remark is anything but typical in that it has a very small free trading float due to the fact that insiders and a few accredited investors own the majority of the shares. Due to this factor, the smallish number of shares outstanding and the average trading volume of around 20,000 shares per day; it is difficult to buy even a few thousand shares without moving the stock price higher. Given the price range of Remark Media ($6.25 down to low $4 range) during the building of these short positions, we would not be surprised to see short sellers pushing the stock higher in a rush to cover their positions,as the surge in buying interest will likely push the shares above their entry prices.
As investors assess the potential for the KanKan app to transform the company’s operations, we expect to see new and significant buying interest emerge. We believe that launch is imminent. If a deal with Alibaba or Tencent is announced concurrent with the launch of Kankan or soon thereafter, we would expect the new buying interest to be of a degree that the stock price will move materially higher and believe that Groove investors who decide to add shares in the current trading range of $4.25-$4.80 will have an opportunity to bank significant double-digit returns in the near term and possibly much more if the KanKan app becomes “a thing”.
RAVE made a terrific run from the price ($8.18) at which we first introduced it to the Groove community. While we were not surprised to see the stock move to new highs ( $13.49) following Shake Shack’s IPO, we are also not surprised to see the stock consolidate and we have been pleased with the levels at which aggressive buyers re-emerge to provide support and additional upside. Longer term, we believe the comparisons will continue to be made between publicly traded fast casual restaurant valuations and what RAVE may be able to achieve with a partial spin-off and IPO of its fast growing PIE5 division. Such comparisons highlight the value disparity we continue to see with RAVE shares and why we believe there remains significant long-term upside regardless of any near term volatility.
Inuvo – Inuvo will be releasing its Q4 and full year earnings report tomorrow. We believe Groove members should be cautious going in to the report due to the difficult Q4 reports from other similarly situated players in the space (like LOCM). We hope that INUV’s moves over the last couple of years to focus their efforts on acquiring higher quality traffic will help to insulate them from some of the issues we saw with LOCM’s report and we will be watching to see if they have been able to grow the bottom line despite the ever shrinking contribution from the legacy ALOT appbar business.
TZOO – last night we added Travelzoo (Nasdaq: TZOO) to the Groove focus list. You can access the due diligence report here – Travelzoo