Analyzing the Streetsweeper’s Inuvo Article

April 17, 2015 at 1:38 pm Leave a comment

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.

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