Archive for May, 2015
We are removing Travelzoo from our recommended buy list and suggest that Groove members consider selling at least enough shares to cover their original cost. On February 3, 2015 we added Travelzoo to our recommended buy list when it was trading at $8.68. At today’s range of $13.25-$13.40, Groove participants can book a 50%+ gain in just over three months and we believe it makes sense to sell at least enough to cover your initial investment at this time.
While we still believe that Travelzoo has the potential to move exponentially higher if it makes the successful transition to focus on commission based agency hotel bookings, we are increasingly seeing evidence that TZOO management is finding it difficult to make the transition. Frankly, we do not understand why the company is moving so slowly, as our most recent checks indicate little to no growth in inventory or markets since the start of Q2 and we can not find evidence that Travelzoo is aggressively pursuing the rollout like we were expecting. In summary, we still believe there is tremendous value here and great potential, we are just not sure that this management team can make it happen and while we see tremendous upside in an acquisition scenario, management’s 50%+ share ownership makes such deals hinge completely on management’s desire to sell the company.
Great article out this week on Inuvo by one of our own and it appears from the trading action that it has either ignited a short squeeze or has caused some investors with substantial capital to take notice of the shareholder value being created at Inuvo. The article gives three very strong reasons for being bullish on Inuvo’s prospects –
1) Very bullish comments by typically conservative Inuvo CEO Rich Howe published in a letter to shareholders this morning –
“As of May 1, 2015 we had a growing and profitable company with an approximate market value of $54 million dollars. We believe we have plenty of room to grow and valuation multiples in our marketspace remain attractive. We are trading at about 1 times trailing twelve month sales in an industry that typically trades upwards of 2 or more times trailing twelve month sales.”
2) Large Open Market Stock Purchases Averaging UP for First Time by Inuvo BOD Chairman and largest shareholder Charles Morgan –
Chairman Morgan filed form 4’s over the weekend that indicated he had acquired another $130K worth of Inuvo stock. We believe any six figure purchase of stock by an insider is significant, but this one is particularly so because we believe that it is the first time since Mr. Morgan first bought into Inuvo that he is making a purchase of shares at a price that is higher than his existing basis – averaging up instead of averaging down. He has made similarly large open market purchases in the past, but most of them were at prices less than half the current trading price and each of those served to bring down the average cost of his holdings. This purchase was substantially higher than his overall basis in Inuvo stock and it was done at prices much higher than previous ones.
3) Acquisition of media/mobile/content giant AOL –
This week it was announced that AOL was being acquired by Verizon. While there are many facets to the AOL empire, the core growth engine is focused on mobile/media/content/advertising – much like Inuvo. While it is not really an apples to apples comparison and I do not believe anyone would suggest that Inuvo is comparable to AOL, the large premium paid for a company with similar lines of business often leads to investors to look around for other smaller players in the space that might be gobbled up at a nice premium. Given the valuation of Inuvo and its profitable and rapidly growing mobile advertising business, it would not be surprising to see one of the larger players in the space make a run at Inuvo. Given CEO Howe’s recent comments, it appears that any discussions would likely require such talks to start with prices in the $4 per share range.
The price has steadily moved higher and the trading volume has increased each of the last two days since the article was published, with a large spike in volume in trading late Thursday afternoon before the close. It appeared for much of the last two sessions that short sellers were actively seeking to thwart any advance in the stock. It will be interesting to see if Thursday’s strong move upwards on very high volume will bring more interest in Inuvo on Friday and if so, if it will ultimately lead to a retest of that $3.50 high from last month.
Groove investors holding Inuvo shares were treated to a strong Q1 report, with revenue of $13.4m and earnings per share of 3 cents, outperforming analysts’ estimates of $12.5 million in revenue and 1 cent per share in earnings. This continued Inuvo’s trend of growing the top and bottom lines YOY and produced what is now the fifth straight quarter of bottom line profitability. More important than the numbers reported for Q1 were the comments by management and their general bullishness on each line of business for the remainder of the year. Management has long been skittish about giving forward guidance so we felt the extremely bullish tone of the call was notable.
Key points on the call –
1) Inuvo CEO Rich Howe’s discussion of the “action metric” as the key determinant of the success of the O&O segments’ success. The action metric tracks the company’s progress in producing revenue generating clicks vs. using the more traditional measures of general traffic trends, unique visitors etc. While these other metrics are not without value, they do not directly measure the things that will create value for shareholders – revenue and profits. The action metric measures both quality visitors (those who do what we want which is click revenue generating ads) and how the quality of those visitors is impacting what advertisers are willing to pay (measured by an increase in revenue per click). Mr. Howe stated “..we’ve seen a 72% increase in clicks and an 18% increase in the revenue per click when compared March, 2014 to March, 2015 within this O&O segment of our business”. This is a very, very impressive achievement and speaks volumes about the strength of the company’s execution of its searchlinks strategy. The implications to Inuvo’s top and bottom lines if this trend continues are huge and management’s comments regarding April trends suggests that to be the case with management comments indicating a 30% increase in revenue over April of 2014.
2) Q&A answers – Mr. Howe’s answers and tone in the Q&A session were particularly bullish. When asked by Zack’s analyst Lisa Thompson about whether earlier comments on the call meant that management was expecting sequential quarterly growth or year over year growth, Mr. Howe replied “both”. Given management’s traditional skittishness about providing quarterly guidance, we thought this was important and very bullish. Additionally, we felt the discussion of potential acquisitions has enormously bullish implications and fall in line with what we have been expecting to see when the stock became more liquid and appreciated to the point that it would make good deal currency. Inuvo is now in position to acquire assets/companies that have consumer appeal as measured by traffic but due to lack of scale, expertise or resources they have been able to sufficiently monetize their traffic/assets. Inuvo has long had the expertise, but was simply not in a good enough financial position to acquire others. The result of Inuvo’s own improvements in monetizing traffic/assets over the last 12-18 months is that they have been able to earn a profit and pay down their debt, something that investors have begun to recognize and the stock price has appreciated as a result. This puts Inuvo in a great position of being able to make accretive acquisitions and thereby accelerate the growth of the company.
Groove investors should not be surprised to see significant volatility in the stock price over the days and weeks ahead as more sophisticated (hedge funds, institutions, etc.) investors begin to build a stake in Inuvo, as they have the ability to move small company stock prices significantly as they build their stakes. Counterintuitively, their interest in buying into the Inuvo story can result in the stock price falling during times when you might expect to see it rise. We remain very bullish on Inuvo’s prospects and view weakness in the stock price without substantive negative news as an opportunity to buy more shares.