Inuvo Update – What is going on with Inuvo?
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!!!
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