PRIME SERIES
Seemingly
all-encompassing, the Internet can feel crowded and overwhelming. People keep using it because it provides
convenience and cost savings for all sorts of consumer priorities like
education and health care. Leave aside
all those delightful puppy and kitty videos.
The fact that the Internet attracts 4.95 billion people to screens
around the world makes it first and foremost a marketing paradise.
Even more important than a large audience is the digital platform’s unique capacity to encourage two-way conversation. This gives the Internet an edge over print or signage or even voice alone to capture the attention of consumers. Chances are each and every visitor is receptive to some message or offer and they are thrilled to give feedback. The trick is to figure out just which message will resonate and which will get passed over.
It is timely for investors to find out why.
Market Developments: ‘cookies’ crumble
One of the most
popular methods to deliver targeted messages to Internet visitors is the deployment
of ‘cookies’, a text file with bits of data identifying a computer as the user visits
Internet sites. The text files are saved
in the web browser to keep track of use over time. Information in the text files allow websites to
recognize users and recall their individual login information. Cookies are used to customize advertising and
target particular consumers who have demonstrated a predisposition for a
particular product or service.
Importantly, the
discontinuation of ‘cookies’ does not mean the end of tracking Internet interactions. There are other methods, such as local
storage or other technologies that save data on a user’s device from the
browser they use. For example, beginning
in 2019, Facebook began bypassing third-party ‘cookies’ by using a first-party
cookie combined with a pixel tracker to surveil European Internet users.
Around the world
various jurisdictions are attempting to protect Internet users with data protection
legislation. The result has been a
patchwork of laws, but the imperative appears to be widespread. A total of 137 out of 194 countries have put
into place legislation to secure protection of data and privacy. In the U.S., five states - California, Colorado, Connecticut, Utah and
Virginia - have enacted consumer data privacy legislation.
Data privacy is
clearly a high priority around the world and some technologies to gather consumer
information may not survive. Consequently, Internet browser owners and others
involved in Internet messaging are keenly interested in new technologies that keep
their platforms viable and effective for marketing messages. It is a market worth protecting. According to Statistica, in 2021, worldwide digital
advertising totaled $521 billion in value, and is estimated to reach $869 billion
by 2026.
Technology: proprietary solutions protect consumer privacy
Inuvo’s proprietary
technology uses artificial intelligence to analyze Internet activity, focusing on
possible motivations behind browser searches or content consumption. It is
a form of machine learning that scrutinizes visitor interactions with Internet
content to predict consumer intent. The technology
is capable of responding to over 200,000 events per second. Importantly, the application does not
identify any one consumer, store their data or track their Internet usage
history.
·
ValidClick is a marketing and advertising service for brand owners or consolidators
of advertising demand such as search or social advertising channels. Clients can use the information in ValidClick
to more effectively place advertising messages on the right websites. Yahoo!
And Google are ValidClick clients on multi-year contracts, who resell
each click on the service to their advertisers.
·
IntentKey helps advertisers reach particular audiences on various devices,
including mobile, tablet, desktop, smart-tv or game consoles. Using IntentKey’s intelligence on
consumer intent, advertisers can get better return on investment for its ad
spend. The platform is embellished with advertising inventory data bought from Xandr,
Inc., the advertising and analytics subsidiary of Microsoft. IntentKey is available to clients
either as software-as-a-service or as a managed service.
Competition: patented technology holds off contenders
The company’s technology is protected by seventeen issued patents and Inuvo has another eight applications pending. This patent shield is valuable given the attractiveness of the market place to competitors. That said, it is more likely that Inuvo would experience competition from more established players than new technology developers. Indeed, Inuvo management recognizes several possible contenders for their clients advertising analytics budget. For example, data suppliers or aggregators are alternative consumer intelligence sources for Inuvo’s clients. Also, direct marketing platforms and media planners can simplify placement of online advertising.
Market Penetration: multi-prong strategy
Likely with that
much contention for its clients’ budget in mind, Inuvo has a multi-prong approach
to reach prospective clients. The company’s
direct sales team targets creative and media agencies as well as brand owners in
crafting tailored campaigns that reach goals.
The company also relies on integrations with various channels with advertising
inventory. Prospective clients fall across
a variety of obvious sectors, such as consumer packaged goods, electronics, auto,
and financial services. Some prospects
may be less obvious such as non-profits or educational organizations.
Inuvo takes a
strong message of high return on ad spend to its prospects. The company is focused
on players in the ‘open web’ that command about $200 billion in advertising
spend. As much as 99% of this slice of
the pie is spent by companies that currently use identity-based technology and
may be ready for an alternative approach such as IntentKey.
Performance: ramp to profitability
Inuvo has achieved
commendable sales growth in the last three years. The company reported a 34% year-over-year increase
in revenue in 2021, a nice jump at the topline after a couple of years of
topline shrinkage. Sales totaled $59.8
million in 2021, composed of 49%ValueClick sales and 51% IntentKey
subscriptions. The company earned a 73.4%
gross profit margin in the years, a high margin as might be expected of a software
developer. The gross profit margin declined
from 81.4% in 2020, on a shift in sales mix.
Operating
expenses in the year 2021, totaled $51.7 million as the company ramped up its marketing
effort. Marketing expenses increased
20.7% year-over-year to $33.1 million. The
category climbed to 64% of total operating costs in the year. Despite the increase in operating spend, the
company was able to achieve a lower reported operating loss of negative $7.8
million. This compares to $8.0 million
in the previous year.
Investors should
probably scrutinize Inuvo’s cash balance and cash generating potential. In 2021, the company used $5.3 million in cash
resources to support operations. Most of
the cash was used to pay salaries and marketing expenses. Working capital investments also required
cash.
To boost cash resources,
in the year 2021, Inuvo raised $13.1 million in new capital through the sale of
common stock. At the end of the year
cash and equivalents totaled $10.5 million.
Marketable securities represented another $1.9 million in financial
resources.
The cash kitty
has come in handy. In the first months
of 2022, the company continued to experience fast growth. Sales in the first
quarter ending March 2022, were $18.6 million, representing 75.5% year-over-year
growth. Operations required $3.6 million
in cash in the quarter, soaking up 29% of cash and marketable securities that
had been available at the beginning of the quarter. Again, operating expenses and working capital
investments were the primary uses of cash.
In a recent interview, CEO Richard Howe and CFO Wally Ruiz expressed confidence in reaching positive cash flow and then operating profitability. He pointed to recent successes winning new customers that validates the company’s marketing investment. Additionally, the company’s data center can process up to two million transactions per second, providing plenty of room to scale up without any more significant investment in infrastructure.
Conclusion: undervalued
Proven
technology, large and growing market and big-name customers help populate the
Inuvo story with all the right players.
Growing sales prove strategies to capture of market share are working. However, the plot is really made interesting
by a seemingly undervalued stock, at least compared to peer groups.
·
INUV is trading at 0.86 times sales
and 1.88 times book value.
·
The advertising sector is trading
at 1.52 times sales while information services trade at 8.21 times sales. A group of Internet software companies
command a 16.3 multiple of sales.
·
From the perspective of book value,
advertising commands a 4.1 multiple time book value, information services 7.64 and
Internet software 10.50 times.
Unlike the
advertising and information services groups, which are composed of seasoned and
highly profitable members, the Internet software group has an average negative 2.3%
operating margin and a negative 10.4% net margin. Thus, we would expect INUV to trade at lower
multiples than the advertising and information services groups, the peer groups
comparison seems to merit at a significantly higher multiples than recent
levels.
What catalyst
might deliver an adjustment to INUV valuation?
Upcoming quarter reports should keep shining a light on successful market
penetration. Indeed, strong year-over-year
comparisons are likely possible in each of the next few quarter reports and
that is likely to attract new interest in the shares.
Neither the author of the Small Cap
Strategist web log, Crystal Equity Research nor its affiliates have a
beneficial interest in the companies mentioned herein.
Underwriters of the Prime series may
have a beneficial interest in, serve as agents of, or act as advisors to the
companies mentioned herein.
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