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Ray Dirks, CP Reports (1 click)
Long/short equity, special situations, research analyst
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In two smart moves, Local Corporation (LOCM) is generating new revenue streams and setting up shareholders for big returns. An important pay-per-call patent and a strategy to launch a series of popular industry-specific websites will drive high-value ad revenues, boosting Local's already healthy revenue growth rate of 40% per year.

First, the company's award of a patent for Enhanced Directory Assistance, a method where a business pays to play its ad when a consumer dials directory assistance, is thrusting Local forward as a key player in the monetization of the multi-billion mobile advertising business. Not just voice, the patent covers text, and voice-to-text, so it's broad and more valuable. Carriers and other online local business websites are using EDA more frequently and will eventually confront Local's patent so there's a great opportunity for future licensing deals.

Second, Local is leveraging its core business of reaching a million local Internet users per day, by launching a series of different trade websites that help people find information on a specific topic or local business to meet their needs. The first one recently launched is in auto insurance. Consumers will be happy with the abundance of information they find. Advertisers, who spend a reported $5.3 billion in the auto insurance category, will pay premium rates to get in front of this targeted audience.

Moving fast, Local just launched another website, in the HVAC (heating, ventilation, and air conditioning) industry and another big spender on advertising. HVAC, an essential service to both home and business, is a $16.8 billion market growing 8% per year. That's a lot of potential ad and lead-generation revenue.

Other industry websites can be effortlessly inserted into Local as they become available and serve a community by monetizing new verticals that 'plug and play' into its existing business. Over time, Local will become a bigger force in city and town markets, and the money will follow as advertisers spend. The local markets, have more than 20,000 websites in their proprietary network.

Local is a company that cares about the user experience. Content on the new websites will be broad enough to capture interest and deep enough to appeal to sophisticated consumers, with easy-to-find facts about local service providers. The sites will have reviews and consumer ratings that are so popular. Leads generated for local businesses will add additional revenues. Of course, the underlying pay-per-call advertising Local has patented comes into play, and so more opportunities for revenue are created.

The cost to Local for giving its shareholders all these chances for solid revenues? Next to nothing. That's the beauty of Local's business model - they are using their existing business infrastructure to generate more money. Local is a fantastic example of a company that is getting it right. They currently are ranked one of the top 10 engines for Local search in the US which is an important to factor in, to understand the potential growth they are about to experience, by just using their existing infrastructure.

In contrast, peer-group company Yelp, Inc. (YELP) bought the German firm Qype, supposedly the largest local review site in Europe, in October, for $50 million. They spent an obscene amount of money to get two million reviews and 15 million visitors, in addition to two lawsuits with Deutsche Telekom, one of which is for 1.5 million euros.

Yelp, with this kind of bad strategy should not command a $1.1 billion market cap. Yelp is growing, sure, but its 2012 revenue run rate is within 20% of Local's and Local has a market cap of only $52 million.

Angie's List, Inc. (ANGI) is another example. The company has not added any value to its user experience since going public and it boasts a market cap of $670 million. Angie's Gross margins might look fantastic at 80%-plus, but with no explanation as to what really constitutes cost of sales. Angie's List has not posted a profit since founded in 1995 and last year lost $49 million. A recent law suit filled alleges breach of contract, deception and unjust enrichment. It seeks an unspecified award of three-times the financial damages incurred under a count alleging deception for allegedly mis-applying credit and debit cards to collect the unauthorized bundled membership fees. I do not think this is a very good business model and that fee based membership for this type of business will be very tough to ever make profitable.

I always like to make my readers aware of the risks in stocks as investments, and Internet stocks are no exception. Competition is strong and technology changes are rapid. Companies with the "next best thing" today could be relics in three months. Advertising is often tied to the economy. Investor interest can be fickle when it comes to what may only be another Internet fad. I don't believe this to be the case with Local Corporation.

I believe this is a good time for investors to take advantage of big differences in valuations. Of the three, I see Local with the leading platform already in place and the IP to go with it, as the clear winner with the most logical business model that points to one thing - making money for shareholders.

Source: All Eyes On Local: Monetizing The Multibillion-Dollar Online And Mobile Consumer Ad Market