Archive for April, 2015
A short selling syndicate published an article yesterday that was picked up by several outlets (Seeking Alpha, Benzinga, etc.) and Inuvo stock fell significantly as a result. While our note to Groove community investors last week suggesting they take their risk capital off the table north of $3 likely blunted the impact on the Groove community to some degree, watching one of our focus stocks fall 40% on heavy volume prompted us to do two things –
1) Buy more stock. In the same way Inuvo arguably got ahead of itself trading from $1.60 to $3.50 in a very short time frame, we believe a sell off of this magnitude based on an article like this makes little sense.
2) Take a closer look at the substance of the article and make sure Groove investors and others are aware of a few things –
a) this article was written and published by a group that had taken a material short position in Inuvo. It appears that the article was written for the purpose of driving the stock price down so they could buy shares at a lower price to repay the lender of shares they borrowed and sold at a higher price. Interestingly enough, those of us who are buying the stock today are quite likely competing with traders from the Streetsweeper group, who must buy Inuvo shares to cover their short position to be able to profit from the article.
b) the article was mostly a takedown of the company’s old toolbar business. Inuvo management would likely agree with many of the points made and that is why they started working two years ago to exit that business and completed their exit about a year ago. Several quarters ago the company quit reporting the revenue earned from toolbars because it was no longer material.
c) the article suggests that there was hype around Inuvo’s Yahoo and Google deals, but this is kind of puzzling to us. We monitor many of the investor forums and we saw little if any mention of these contracts, which was not surprising because the company has had these contracts for many, many years. While recent press releases mentioned that the company had renewed these agreements, there was no hype or even significant discussion among investors about the impact of them – these contracts are really just business as usual for Inuvo.
d) The article quoted a “long time analyst” in saying that Inuvo’s new targeted ad units are really just “banner ads”. While there is a little more science than a random banner ad going on there, we do not disagree that at the end of the day they are just advertisements that reside in places where old school banner ads used to be. However, we think targeted advertising is a pretty good business and wonder if that analyst has ever reviewed Google and its even more boring and old school text-based pay-per-click ads. Google’s adwords are not quite as flashy as banner ads, but like Inuvo’s new ad units they are placed in contexts where consumers seeking certain content might find them interesting or useful. Advertisers spend many billions of dollars each year to gain exposure through those placements and there are very few inventions in the history of corporate America that have created more wealth in a short time than adwords. While we don’t think Inuvo has developed anything that will keep Larry Page or Marissa Mayer up late at night plotting counter-measures, we do think Inuvo has developed a mousetrap that is better than the previous iteration of advertisements they were offering and this appears to be driving the company’s improving profitability.
e) The article discussed a “striking decline” in Inuvo’s traffic, but only showed charts for two of Inuvo’s significant URLs. We have long known that the company uses opportunistic pay-per-click ad placements to drive traffic to its websites to supplement the organic traffic that finds them through direct navigation, search engines and links from other sites. While we agree that the declines in traffic for example sites used is pretty striking when compared with last years, but we suspect that Inuvo is likely finding greater opportunities for driving traffic with their other URLs and note that compete.com shows “finance.alot.com” having February traffic that was slightly higher than last year’s and approximately 100% higher than January of last year. Living.alot.com did not have meaningful traffic one year ago, but it has averaged over 100k unique visitors over the last three months. If the noted examples do turn out to be representative of a wholesale decrease in traffic for ALOT sites, we will agree that should dampen enthusiasm for the Inuvo growth story. However, we do not think the random sample chosen necessarily reflects that yet and we would wait to see the reported results for that period before making that determination.
f) The last point made in the article was that Mr. Howe (when pressed) said that the board had discussed the sale of more stock. We do not view his comments as negative in any way, quite the opposite, as it would be surprising if a board of directors meeting were held after the company’s stock had risen to multi-year highs and there was not some discussion of whether they should consider selling stock and/or using the stock as acquisition currency. We believe the purpose of that line of questioning was so that the writer of the article could give the impression that a dilutive stock offering was imminent. We have seen nothing to suggest that is the case.
In summary, while we agree that the stock traded a little ahead of itself in trading up to $3.50, we think the 40% sell off since hitting those highs was driven by an article full of misdirection (as if the toolbar business was relevant) and specious assertions rather than any substantive operational or financial issues. We are buyers of the stock today and will be interested to see how quickly those who have gone to such great lengths to drive the stock price down will be joining us in buying Inuvo shares.
Travelzoo reported an excellent quarter today, one that gave evidence of strength in the core business and the report plus several encouraging comments on the conference call lead us to believe that management remains properly focused on rolling out the hotel booking service. Additionally, we were pleasantly surprised at the degree to which the marketplace seems to be grasping what we had already come to believe – that Travelzoo’s core business has stabilized and the several quarters of heavy investment with little revenue to show for it may be largely behind us, as we expect that future reports will be increasingly impacted in a positive way by hotel booking revenue.
Management’s gloomy outlook and talking down of expectations on the Q4 call led us to believe that Q1 would be less than impressive – in line with analysts’ estimates at best and more likely coming in slightly below the analysts’ expectations. Instead, Travelzoo reported earnings of 13 cents per share, a full 5 cents per share higher than analysts’ expectations and they also reported a top line of $36.5m, outperforming the estimates by $1.7m. Additionally, management made comments in the prepared statements and in the Q&A following the report that were undeniably positive – something we did not get on the Q4 call a few weeks back.
A few of our favorites –
“…we continued to run more deals through our Hotel Booking Platform instead of the Getaways model” + “..our main focus is on hotels at this time”. These comments lead us to believe that TZOO management from the top down understands the transformative opportunity here with the hotel business and all the noise after last quarter’s report about the company moving away from the hotel booking business was just that – noise.
“We had a slow start and then we really did quite well in March” We believe this is evidence that the company’s operations are starting to gain momentum at a really great time and that the stabilization and/or growth of various lines will add fuel to the fire when the hotel booking service results start to materially enhance the company’s income statement.
“we have very good coverage now in sort of the top 10 destinations for North America”. This is great because it means there are now markets where the company can test its full-blown marketing approach vs. some segmented approach that would not give a true indicator of how the various approaches work. This is a key marker in the company’s journey to offer hotel booking on demand to all of its subscribers worldwide, something we hope to see by the end of the current fiscal year.
A development we have been watching that was not discussed specifically on the call is Travelzoo’s deal with Getaroom and a third-party provider of hotel booking connectivity. We had been expecting to see Travelzoo affiliate with one of the larger players in the hotel booking space to gain the critical mass of inventory they need to fully leverage their 27 million strong base of subscribers and we were pleased to discover recently that Travelzoo.com is live with such a deal to access the inventory of Getaroom, a rapidly growing wholesaler of lodging that now counts over 80,000+ hotels in its program. It appears that Travelzoo is offering the Getaroom inventory in its existing markets currently, but we expect to see Travelzoo eventually roll out Getaroom and or other partner’s inventory in other markets of significance (those markets called “secondary” by Mr. Bartel on today’s call) over the next few months.
Getaroom is a great strategic partner for Travelzoo as it allows them to get the hotel inventory they need (80,000+ inventory and deep coverage in every market of significance in North America) without boosting the fortunes of their biggest competitors (Priceline & Expedia) in the space. Additionally, it allows them to offer rates that are unique from those of its ubiquitous competitors whose far-flung affiliate partners (see Mr. Bartel’s Trivago conversation on the call about this very situation) make their rates seem like the going market rate when in fact there may be a better rate for consumers who will shop Travelzoo in their shopping process. Getaroom often has lower total prices than Expedia, Booking.com, Priceline, etc. and Travelzoo will benefit tremendously from being able to offer rates that are distinct (and in many cases lower) from those offered by its larger competitors.
Getaroom is run by Bob Diener and David Litman, the original founders of Hotel Reservations Network, which became Hotels.com. Messrs. Diener and Litman essentially invented the wholesale lodging business that transformed Expedia from a barely profitable OTA into a powerhouse that eventually gobbled up most of its competitors and that allowed Priceline go from company doing a reverse split to avoid becoming a penny stock to the $1200+/- stock it is today. While Priceline’s wholesale business is now secondary to its agency hotel business (booking.com), I think it is fair to say that the engine that powered the growth of Expedia and Priceline has its roots in the model developed by the pioneers who now lead Getaroom.com and we think this is great company for Travelzoo.
We continue to believe that the hotel booking business will transform Travelzoo and create significant wealth for shareholders, so we are pleased to see the company taking the steps we have long believed needed to be taken to expand the hotel business at a faster pace. Travelzoo’s arrangement with Getaroom will allow them to better leverage their subscriber base and expand their market coverage significantly in a very short time frame as they gain very broad and deep inventory with unique “Best Rate Guaranteed” rates. Additionally, we believe Travelzoo’s first quarter report indicates that the company has turned a corner with its core operations and we expect the hotel booking business to have a very positive impact on Travelzoo’s numbers going forward. The rally in Travelzoo shares on such large volume suggests that new investors are starting to understand what can happen here as the company transforms its model and those that have previously bet against Travelzoo may finally be coming around too. With over 1/3 of the “true public float” sold short prior to the release of the quarterly report, it’s no wonder that there was such scrambling for shares today and we would not be surprised at all to see that continue until it finds a price range where more investors are willing to sell enough shares. Despite the move of over 50% since we first recommended TZOO to the Groove community a couple of months ago, we think investors would do well to hold on to their shares here as today’s move only reflects the turn and we expect Travelzoo to be trading at significantly higher prices a few months out.
A couple of weeks ago we wrote that Inuvo’s move to a new 52 week high above $1.75 would expose more investors to the Inuvo story and that we expected the stock to establish a new trading range north of $2 / share. In just over two weeks, Inuvo shares are now trading well above $3 per share and the volume traded each day has increased ten fold. We have been inundated with questions asking why this is happening and we believe there are 3 possible reasons for the move –
1) Inuvo is about to be acquired. This is a very real possibility as there are plenty of companies with very high multiples of their earnings or very high valuations for businesses that are not yet profitable and acquiring Inuvo’s $50million in profitable revenue per year would be instantly accretive. It is no secret that Mr. Morgan and other large holders acqired many shares at prices over $2 per share and it is difficult to imagine a scenario where they would sell the company at breakeven. Given the range of typical premiums paid in an acqusition scenario, Inuvo’s stock needed to be trading much higher than the $1.50 range it was trading at last month for a reasonable premium to reach a price that would be acceptable. We think this is less likely than #2 or #3 below.
2) Inuvo is about to acquire another company (or several) that will significantly add to its growth potential. Inuvo CEO Rich Howe has a very strong M&A background from his time at Axciom and we have long believed that a significant component of the company’s stated plan to grow to $100m+ in revenues within 3 years would include the acquisition of other companies or assets. Inuvo’s stock price (relative to its earnings) had been so low for so long and the valuations for VC backed and other non publicly traded assets has grown so much over the last few years that Inuvo’s diminuative valuation and smallish cash position made it difficult to impossible for the company to do deals that were accretive or otherwise made economic sense. With the dramatic increase in buying interest for Inuvo shares over the few weeks and Inuvo stock now trading in the $3.25-$3.40 range (40x ttm earnings), CEO Howe should have much more flexibility to pursue significant acquisitions. We believe its likely that Inuvo management already has some potential targets in mind, we note that previous acquisitions have been preceded by major increases in the stock price/volume traded and we would not be surprised to see a deal announced in the very near future.
3) Inuvo’s ridiculously low valuation relative to its growth and prospects has attracted new investors (and likely significant institutional interest) and the company’s just announced expansion has added fuel to the fire –
Things are obviously going well for the company to add that much room for growth and the company’s very low cost structure should allow a significant portion of any revenue gains to fall to the bottom line. Could the recent move higher and increased volume simply be the long awaited recognition of the remarkable turnaround that has occurred at Inuvo over the last couple of years?
We believe that #2 or #3 are the most likely of the three scenarios above, but note that all three scenarios allow for additional long term gains from current levels. Regardless which it turns out to be, we note that the stock price is now up over 200% from the $1.05 where we initially recommended that Groove investors buy in. Those who followed our advice to double down as the stock traded below our initial price recommendation may have a cost basis in the 80 cent range, making today’s trading up to $3.50 over 300% higher than the Groove average cost. Regardless, all Groove investors should have a 200-300% gain at this point and we believe investors should consider taking some profits at these levels. While we do not suggest selling all of your shares in the face of this fierce rally, we do think it might be a good time to sell at least enough to cover the cost of your original investment. As we have recommended with other holdings in the past, we are recommending that Groove investors take some gains off the table and see what develops while playing with “house money”. And congratulations to the GrooveVC community for finding another multi-bagger!!!