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Some stocks are simply great “stories” in hot, high growth sectors, with business models chock-full of potential. That description fits Local.com (NASDAQ:LOCM), which has been tapping into the sizzling “location-based service” market since 1999. Like other companies in this niche, Local.com pairs internet users with the best nearby shopping values, and anything else that can generate clicks.

A ton of ink has already been spilled about how big these services will be in the not-too-distant future. Fittingly, the space is quickly being populated with competitors--including Foursquare Labs, and my personal favorite, Snap Interactive (OTCQB:STVI), which will soon be mainlining Facebook’s massive member base with its Whoisnear.com platform. For now, however, I’d like to focus on Local.com, which is about to release its latest quarterly earnings report—and an important report it is.

On paper, Local.com looks like it has slowly and steadily started to maximize revenues with a multi-pronged business strategy. The website, Local.com, gets more than 15 million visitors per month. Through Local.com, users are linked to local businesses offering the goods and services they’re looking for. This creates an instant direct marketplace for advertisers to reach shoppers. The company also owns a syndication network of about 750 regional media sites in the U.S., and has 50,000 subscribers to its sales and advertising services operation.

One way to look at LOCM financial results is year-over-year. LOCM turned a profit in 2010, earning .25 cents a share on record revenue, despite the exceptionally dismal economic climate. That accomplishment didn’t go unrewarded. Earlier this month the company’s CEO, Heath Clarke, was honored by the Orange County Business Journal. The Journal noted that LOCM’s average 50% annual growth rate was the leader in the directory search market. The company also qualified as one of Deloitte’s 2010 Fast 500 growth companies in North America.

In 2009, Local.com bankrolled about $56 million in earnings, and posted a net loss on the year of $6.2 million. In 2010, the company earned $84 million in revenue and turned a nice profit of $4.4 million. Operating expenses have gone down slowly, but steadily since 2008, and in 2010 the company finished with operating income in excess of $3 million. That’s a nice turnaround.

But not so fast. If you look at Local.com’s quarterly revenues for all of last year, you can see where the risk lies in a LOCM investment. After squeaking out a profit of $134,000 in the first quarter of 2010, the company nabbed $1.2 million in net income during the second quarter and hit the big time with a $3.7 million third quarter. Last quarter, however, the company’s bottom line returned to its losing ways with an $891,000 loss. And despite the big win in 2010, a loss of $8.5 million in 2008, combined with 2009’s red ink, still translates into a loss of $11 million over three years.

Advertising revenues are always hard to predict over the long term, and one bad quarter can be excused if Local.com can regain its stride from the first three quarters of 2010. Short-sellers aren’t buying it: in fact they’re very much betting against the company, with about 25% of LOCM’s 20 million share float sold short.

It might only take one good batch of numbers to send shares of LOCM higher again, with short-covering adding fuel to the fire. If those earnings numbers aren’t up to snuff, it may be slow-sledding for LOCM stock for the foreseeable future, as some of the new kids on the block, and market forces, conspire to inflict a regional discount on LOCM’s share price.

Source: Local.com: Looking to Tap Profits in Crowded 'Neighborhood' Niche