Twelve month's ago, the online marketing and app development company Inuvo (INUV) was in dire straits. The company was bleeding red ink and its financial condition had deteriorated to the degree that its development of the killer online shopping app Bargain Match might be all for naught. While the app was very appealing and of very high utility to consumers who shop online, circumstances had evolved in the company's other lines of business that left the company without the financial resources to market the app.
Fast forward 12 months and we find a nouveau Inuvo, after the company's acquisition of the ALOT business that primarily consists of an Appbar and home page products that are monetized through a long standing relationship with Google (NASDAQ: GOOG). The company's fortunes have since turned dramatically as the addition of the ALOT products plus significant cost reductions and several other tweaks have allowed the company to turn the corner to cash flow positive ($1 million in EBITDA reported for Q3 three weeks ago) in just the second full quarter of the combined operations. Despite this major turnaround, the stock is still trading at a huge discount to its price before the company acquired the ALOT businesses ($1.70 before acquisition to $1.03 at today's close). We believe that the stock is significantly undervalued based on the momentum of its core business, but recent developments make the company's stock even more of an undiscovered gem, as the company is now getting money for nothing and some clicks for free.
Money for Nothing
Infusion's Bargain Match App generates revenue for the company by earning an affiliate commission each time a consumer with the Bargain Match browser extension app installed makes a purchase from the online store of a participating merchant, which currently includes nearly every major retailer including Target (TGT), Wal-Mart (WMT), Best Buy (BBY), Sears (SHLD), Home Depot (HD), Lowe's (LOW), Walgreen (WAG) and many other niche retailers as well (over 2,000 retailers total, click here for a scrollable list). The company essentially splits the affiliate commission earned on any sale with the consumer who makes the purchase and this "cashback" component builds up in an account created for that consumer giving him/her additional incentive to continue using the Bargain Match app. Consumers generally find very high utility in the Bargain Match service because it automates the couponing process, saving a consumer the considerable time it can take to scour the web to find a coupon. Additionally, the Bargain Match App allows the consumer to get the full discount from that coupon while also earning the aforementioned cash back on the same transaction. This is somewhat unique, in that there are several services that offer a really strong cash back component or a good coupon finding service, but not many that allow the consumer to get the advantage of both the coupon and the cash back and there are none that make the process as seamless as the Bargain Match app does.
So in Bargain Match Inuvo had a killer shopping app that would be very appealing and have high utility for the masses. When an app is this good and creates this much value for consumers, they will find it their way to it right? The "build it and they will come" distribution model for apps has often fallen short of what developers have hoped to achieve and the Bargain Match App is no exception. Also, the unfortunate timing of introducing a shopping app after much of last year's holiday shopping season rush had already occurred while offering an app that does not work on all the major web browsers did not help much either. Despite these hurdles that caused Bargain Match to stay below the radar of most consumers, the consumers who were exposed to the Bargain Match app have apparently been quick to adopt it, many have apparently liked it enough to keep using it and some apparently are passing it along to friends, as management indicated that Bargain Match revenue had increased to as much as $150k per month towards the end of Q2. While this is certainly not a huge figure for a publicly traded company, we believe that it gives evidence of the value consumers see in the Bargain Match app, as it would take significant use by consumers to achieve $150,000 in affiliate commission revenue during a season that is generally among the weakest for online shopping and it came during a period where the company was not spending money to promote it. Thus, the "build it and they will come" approach was not quite enough to make Bargain Match a blockbuster, but the value proposition for consumers (who had compatible browsers) was enough to keep those who tried it to keep using it and enough for the company to see an increasing number of consumers download the app in spite of the lack of any significant investment in marketing it.
In March of this year Inuvo completed the acquisition of the ALOT assets, the most significant of which is the ALOT Appbar. Alot.com's customizable Appbars allow consumers to choose from among hundreds of Apps to include in the bar at the top of their browser. These apps offer quick and easy access to a consumer's favorite web applications (Facebook, Email, Pinterest,etc), entertainment (Netflix, YouTube, Pandora, ALOT Radio) or shopping (ebay, Amazon, Groupon) and hundreds of other options. The main web search functionality offered is powered by Google, so that any given search query will return the same results as would be returned from a search on Google.com and the company earns a percentage (typically 75- 80%) of the fee advertisers pay Google for the clicks through to their websites. ALOT's business model requires that they spend heavily to promote the Appbar, as attrition on toolbars and appbars generally is quite high and growing the business profitably requires that the company constantly acquire new users. with hopes that each new user will keep and use the Appbar more. Thus, since inception a key competency for ALOT has been to refine the best approach to effectively (and profitably) use online marketing channels to acquire new users of its Appbar and it currently spends close to $2 million per month through these channels.
Following several months of development and testing, in October Inuvo began offering consumers who were downloading the Appbar the opportunity to opt in to get the Bargain Match App too, essentially allowing the Bargain Match App to "piggyback" on the large advertising budget used to market the ALOT Appbar. This means the Bargain Match app that has previously exhibited the potential for growth if consumers could become aware of it is now being offered to consumers who are seeking apps to improve their online experience. The beauty of this for Inuvo shareholders and what potential investors may want to consider is that the incremental cost of offering the Bargain Match App to these tens of thousands of consumers is essentially zero. Thus, the Bargain Match App and its tremendous value proposition is for the first time being presented to thousands of consumers per day. The timing could not be better, as we are approaching the holiday shopping season where those consumers who have this app installed will likely be generating revenue for the company at a much greater clip than they would during other times of the year. Even more encouraging are management comments that the majority of consumers who were being offered the Bargain Match App were choosing to "opt in" and take it and also that early indications are that the attrition rate for Bargain Match is proving to be much lower than that of the Appbar.
So while Inuvo is still spending "nothing" to market the Bargain Match App, it is now signing up thousands of consumers per day who will undoubtedly generate significant revenue ("money") for the company. Thus, as of the start of the fourth quarter, Inuvo is now getting "money for nothing."
Some Clicks for Free
The ALOT Appbar's business model is heavily reliant upon search revenue that is derived from "clicks" on the pay per click ads served by Google along with each search using the ALOT Appbar search box or the search box on the ALOThome.com page. An online community of small cap investors called GrooveVC.com (of which the author is a member) has recently focused their "collaborative consumption" efforts on Inuvo, putting their "buy the stock/use the product or service/spread the word" mantra to the test and challenging all Inuvo shareholders to download the Alot.com Appbar and Bargain Match App. The idea is for all who participate to use these apps for all their online shopping and internet searching; and for each participant to recruit others to join the effort. The most current effort highlights the potential for Cyber Monday and pushes all participants to use the Bargain Match App and the Appbar to the company acheive record results.
While it is not ascertainable how many investor/consumers this campaign has been able to bring into the fold, it is a fact that Inuvo is getting the benefit of incremental traffic and revenue that requires no marketing spend whatsoever. Some of the group estimates suggest each new participant might bring in several hundreds dollars of click revenue per year given that these are typically more financially savvy investor types who are more likely to consume more financial products/services and the clicks for ads associated with those types of products/services are among the highest paying keyword terms. Whether that revenue number is high or low and even if the participants end up being in the hundreds instead of the thousands, a company as small as Inuvo stands to benefit from such high value incremental traffic that they have no expense in acquiring (analyst-speak for getting "clicks for free").
In summary, Inuvo is no longer in dire straits, but the stock is still trading at levels that suggest it is. We believe the Q4 results for Inuvo will prove to investors that the company has turned a corner and the "money for nothing and some clicks for free" may provide enough incremental revenue without added expense to push the company to a GAAP profit. Regardless whether that occurs in Q4, we believe the returns on Bargain Match will allow Inuvo's core business to accelerate in a way that will have a positive impact on all lines of its business due to higher revenue share with Google and Yahoo (NASDAQ: YHOO). As this becomes apparent to more investors, we expect the stock to move substantially higher. We believe that investors who buy Inuvo stock at current prices could double their money over the next few months and potentially gain much more several quarters out.