Local.com Rising Sharply - Yet Still Undervalued

Local.com’s (LOCM) recent disclosure of a patent covering methods of responding to enhanced directory assistance inquiries and the referral advertising model extends the appeal of an already attractive acquisition target and furthers the likelihood that Local.com could evolve into a royalty fee “toll keeper” among participants in the rapidly growing local search and free 411 directory services niche.

The 411 directory service is an $8 billion per year business that has recently received much attention from the venture capital community as well as several large technology companies, with new entrants including Microsoft's (MSFT) 1-800-555-TELL , AT&T's (T) 1-800-YellowPages and Google's (GOOG) 1-800-GOOG-411.

The most significant among independent companies in the space is Jingle Networks, which claims to have already taken over 3% of the market. While it is difficult to place a hard valuation on the value of Local.com’s patent that appears to cover the monetization model that appears to be used by each of these players, we can certainly take note of the valuation accorded to Jingle Networks of $150 million + in its last round of venture capital financing. We note that this round of financing occurred at a time when Jingle Networks was not profitable and had taken only about 1.5% of the total market for 411 directory services.

While we recognize that the value of Local.com’s 411 directory service patent is difficult to ascertain, we do believe it is considerable when viewed in light of the valuations accorded to nonprofitable startups in the space that are 25% higher than Local.com’s current market cap. Further, it makes the case for an acquisition of Local.com by large technology companies who are moving aggressively into that space (Microsoft, Google or AT&T) that much stronger.

We noted in a previous article the appeal of Local.com to the likes of Google, Yahoo, Microsoft and Yellow Pages companies based on the previously announced patent covering local search. We have taken note of subsequent commentary that speculates on the enforceability of that patent and feel that we would be remiss if we failed to remind readers of the debates that swirled around the enforceability of the very broad and far reaching patents that were granted to Qualcomm and remind investors that it was upon this “wall or worry” that the stock achieved much of its meteoric rise.

This is the very reason that we made the allusion to Qualcomm in the first place. Whether or not and to what degree the patents will ultimately be enforced is open to speculation either way at this stage. We simply feel that a company with a market cap that is a fraction of what a larger player might pay to own these patents and a market cap that is even lower than what might be earned annually in a single licensing agreement with a major search player is the kind of risk/reward scenario most investors seek diligently.

We view the recent “patent driven frenzy” (per Barron’s article) in trading of Local.com’s stock to be a very positive development for the company that has ancillary benefits well beyond the obvious value of the significant gain in market capitalization that has occurred. One of the largest items on the expense side of Local.com’s income statement is its cost of traffic acquisition, where it pays very significant sums each quarter in a “pay per click arbitrage” that seeks to profit by earning ad revenue that exceeds its cost of acquiring that visitor or at least gives a positive enough Local.com search experience that the visitor returns as a direct navigation visitor (i.e. types in "www.local.com" instead of using a search engine to find them) in the future.

Local.com spends millions each quarter on a “per click” [PPC] or “per impression” [CPM] basis to acquire these visitors. Over the past week, the trading frenzy in Local.com shares has resulted in repeated mentions of Local.com on CNBC, Bloomberg, CNNfn and other financial news outlets and the stock has received favorable exposure as one of the top performing Nasdaq stocks in each days listing of such in every newspaper in the US that offers such stock listings. The value of this additional exposure to the demographic seeking such news is considerable in light of the relatively small size of Local.com’s search operations, the likelihood of significant gains in direct navigation traffic that could result and Local.com’s increasingly efficient engine for monetizing the increased traffic. Local.com would typically have to pay millions of dollars for such direct navigation brand building exposure.

We continue to believe that the company will ultimately be purchased by one of the larger players in the search or directory space. Based on recent action in the marketplace along with commentary from executives and analysts, it appears that Local.com management would give favorable consideration to offers in the $200 million range. Considering the valuations given to other companies in this space, the potential value of its intellectual property, the traction it seems to be gaining with its core operations and the infancy of the markets it serves, we hope that management will require something substantially higher than that.

Disclosure: Author is long LOCM

LOCM 1-month chart:

Comments

[cravates:]

Is Point Clear Strategic Holdings a real entity or fake?

2007 Jul 06 12:14 PM

[ptrader:]

YES!!!! we agree this is a fast moving segment, we think your right on about the possibilty of being taken out and the price range seems like it would be easy for a big player to swallow...ptrades.com

2007 Jul 06 12:30 PM

[Off the Rad...:]

John,

Very well written article which I very much agree with. Today's pretty strong action on LOCM recouping earlier losses speaks directly to the credibility of your commentary. The share price will inevitably continue to be volatile, but as you note, their intellectual patented property has significant value to a host of different potential acquirers.

Along the same theme, I would also suggest you to take a look at Modavox, MDVX which too recently announced it has received additional patents on its online.

PHOENIX--(BUSINESS WIRE)--Modavox, Inc. (OTCBB: MDVX - News), Internet broadcasting pioneer and holder of several patented technologies, today announced it has received an official communication from the U.S. Patent and Trademark Office (USPTO) announcing the allowance of a new patent arising from the company's proprietary Internet technology. In this communication the USPTO also provided a favorable indication toward one or more additional pending patent applications relating to Modavox's core technology, although some interplay with the USPTO remains before Modavox obtains a final approval for any additional patents.

Andrew Burgess, Modavox Intellectual Property Consultant, stated, "The claims of the recently allowed patent reflect a further refinement of the legal definition of Modavox's technology from the broad, groundbreaking technical space created by Modavox's original patent. In this latest patent we have further refined the legal definition of our invention to reflect how the broad concepts of that invention are implemented in state-of-the-art delivery infrastructure and delivery practices seen in the market place today."

David J. Ide, Modavox President and CEO, stated, "We're focused on using our technology to capture new business, and create useful applications of our products, such as geographically-targete... advertising and user-customized content delivery, all built on the framework of our patented technology."

Modavox CTO and Chairman Nathanial T. Bradley added, "We're pleased to have our intellectual property fortified with this new U.S. Patent. This gives us the opportunity to continue our leadership in our field and is a testament to our tenure and growing opportunity in the production of innovative and breakthrough online communications technology products."

Dr. Daniel F. Coughlin, Partner, Fox Rothschild, LLP, stated, "The latest decision by the USPTO on Modavox's patented inventions is a further affirmation, in the context of a rigorous technical examination, of the pre-eminence of the company's technology, both legally, and in the marketplace. With an expanding arsenal of intellectual property rights, Modavox will now be better equipped than ever to not only deliver marketplace solutions for their clients and customers, but also to secure richly-deserved recognition for its pioneering inventions in this technical space. The issued and newly allowed patents, along with their pending patent applications, will undoubtedly prove to be key components to bring Modavox's proprietary technology to the broadest possible base of clients and licensees. In my view, it will be only a matter of time before the industry will universally recognize Modavox for its technical advances in this field."

and a recent article featured here at Seeking Alpha by the former Dir. of Research at Knobias and now President and Editor at Market News First.

He wrote, "Think about the way that advertisers have traditionally used the spray and pray method of advertising. The Internet has changed the way advertisers target specific demographics and a new concept is circulating in the media space, creating a disruptive technology that is getting the attention of everyone in the industry. As the media space continues to explode in every market cap, this disruption has resulted in media consolidation across the board.

Need examples? Look at Sam Zell's purchase of the Tribune Company (TRB), Rupert Murdoch's bidding for Dow Jones (DJ), Thomson's (TOC) recent purchase of Reuters (RTRSY) and a silent bid by private equity on the table for Bloomberg.

Clearly, the media space is as hot as any sector on Wall Street. The stark reality is that Wall Street analysts covering the media space have undervalued all assets because of this simple supply and demand function. No longer are there three mediums for content delivery; there are now six delivery platforms for content. It has quickly evolved from broadcast TV, cable TV and radio to broadcast TV, cable TV, radio, PC, laptop and cellular phone services. This means there is the same amount of content available and double the demand, in turn, making all existing content immediately more valuable.

What this means is billions of dollars spent on media-driven advertising have more places to run ads. For example, ESPN just became worth twice as much, and all IPTV content on the Internet just became more valuable. This is the disruptive technology the industry has been squirming about since 2001. Look out Google (GOOG), look out AOL (TWX) ... you may have an issue.

A subtle and somewhat still under-the-radar player in this whole picture is Modavox Inc. (MDVX.OB), ands many industry experts are now just beginning to wonder if some mega market cap Internet giants have been infringing on their patent for years now?

Modavox, Internet broadcasting pioneer and holder of several patented technologies, announced last week that it has received an official communication from the U.S. Patent and Trademark Office [USPTO] announcing the allowance of a new patent arising from the company's proprietary Internet technology. In this communication the USPTO also provided a favorable indication toward one or more additional pending patent applications relating to Modavox's core technology, although some interplay with the USPTO remains before Modavox obtains a final approval for any additional patents. This new patent covers Advertising and Streaming Media Delivery technology, one of the hottest and talked about technologies of the time as advertisers seek to monetize online ad dollars through streaming advertisements and geo-targeting of consumers. One has to wonder if any of these Internet house hold names may be interested or benefit from owning or partnering with this little company for its potentially very valuable intellectual property ... I think I already know the answer. The space itself has recently seen numerous acquisitions and consolidation making Modavox one to watch closely.

The question I ask myself each day is this: shouldn't we, as a news agency, cut a deal with Modavox to license their product? I think the answer to that question is a resounding YES!!!!"

Note that Modavox's patent law firm has posted the article to their own site. This is the same law firm that has apparently taken the issue up on a contingency basis.

www.foxrothschild.com/...

There's obviously a lot to digest here but I thought you would find Modavox to be an interesting situation. In addition to the patent issue, the company is profitable, has no debt, huge margins providing for huge earnings leverage and has a talented management team owning a large amount of the company's shares really alligning their goals with their shareholders.

Keep up the good work and thanks for your comments on LOCM as a fellow long.

J

2007 Jul 06 12:33 PM

[Kwarehouse:]

Here's information on Clear Point:

He is the manager of Point Clear Strategic Holdings in Point Clear, Alabama. Point Clear Strategic Holdings is a value oriented activist investment group seeking opportunities in small cap technology companies.

2007 Jul 07 10:12 PM

[Kwarehouse:]

Check out this recent chart from Barchart on locm:
quote.barchart.com/tex...;code=XTDS

2007 Jul 08 03:37 PM

[Directoy:]

Local Business Directory
For the website owner, the website directory allows the public to find their business and personal websites easier than just hoping they stumble across them. It makes the hit count higher because they are easily found when needed. Listing your website with a website directory is a positive step to more sales and a larger customer base.

2008 Dec 30 06:06 PM