5 Reasons MIVA Is Likely Trading at Less Than Half Its True Value

Jan.29.08 | About: MIVA Inc. (MIVA)

Miva Inc.'s (MIVA) stock has recently traded down to levels not seen since the depths of the dot com boom. What I find interesting is that this appears to have occurred without any specific negative news that would drive the stock down to such levels. Granted, the most recent quarterly earnings report was a fiasco and investors' discontent seemed justified as the stock sold off from its previous trading range of $4.50- $6 down to the $3 range. However, the recent downdraft that brought the stock below $1.50 seems a bit overdone, particularly in light of some recent developments and the downside protection resulting from the likely value of the company's assets in a merger scenario. The reasons that MIVA could be worth substantially more than its current trading range would suggest are as follows:

1) Miva's "Alot.com" toolbar initiative seems to be gaining traction. The recent PR indicating the number of active toolbar users was a pleasant surprise and the "alot.com" website has seen enormous traffic increases over the last six months. Additionally, the Miva direct owned URL http://www.alot.com is showing increased traffic rankings daily and is now ranked higher (using Alexa's "traffic rankings" reports) than many other better known search portals, ranking considerably higher than even Looksmart.com and Local.com.

Miva Direct's toolbar initiative, (which includes the "Alot.com" toolbar program) now has over 7 million active users. This means that over 7 million people have a little search box in the corner of their browser and when they decide to search for something on the internet, they can just type it into the box and it will do a Google (Nasdaq: goog) search for that entry. The search results will be exactly what the user would get if he left the web page he was visiting, typed in the URL www.google.com, entered his search terms and clicked to execute a search. The only difference is that 1) the user never has to leave the web page he was visiting, he just types his search request into the little search box on the toolbar and 2) the Google ads displayed with each search pay Miva a revenue share each time they are clicked. For instance if the person searches for "Chicago injury lawyer" and then clicks on one of the ads that Google includes on the page, Miva would typically get 75 - 78% (based on average Google AdSense payout per 10Q) of the revenue Google charges for that click, which is usually anywhere between 10 cents and $5 dollars.

Miva management has not talked up this aspect of their business very much and they have made no projections other than that they expect revenue to be higher for the toolbar segment in Q4 than it was for Q3. We believe that the "Alot.com" business could be a major source of growth and could even eclipse their core advertising network in terms of revenue if current trends persist. Additionally, we are pleased with managements decision to spend more resources in Q4 to focus on growing this segment, as it appears that the margins that could be earned here are attractive. Once the toolbar is installed in a users' browser, Miva has little to no cost involved in maintaining this position and anytime the consumer uses the search functionality and then clicks on one of the ads, Google pays MIVA.

The math here could get very interesting - how many times do the seven million consumers search each day and how often do they click on an ad? If they all just do one search per month where they click on a $1 ad, that means Miva could be paid $.75 cents x 7 million x 3 months = $15.75 million in revenue per quarter, which would be $63 million in revenue per year with very little associated expense. While its possible that not all of the 7 million who have downloaded the toolbar will do a search and then click on an ad each month - I personally use my toolbar search 15 - 20 times per day and I click on ads from time to time. When I am looking to buy something specific, I might click on nine or ten ads on that particular day. While my web surfing might be different from what others do each day, I do think its fair to imagine that those seven million installations do get used some each day and that it often times will lead to clicks on the ads for any given search completed. As you can see, the numbers look pretty amazing with just the one ad per month scenario - how many of those 7 million consumers will do that and more?

2) Settlement of Litigation. This have been dark clouds hanging over Miva ever since the various"click fraud" and "gambling advertising" actions were filed. These clouds grew even darker when the settlements of the larger industry players were announced. Many investor's likely shied away from MIVA's stock for fear that the company's cash position could get wiped out by a settlement similar to those reached by Google/Yahoo (Nasdaq: YHOO) in these lawsuits. Yesterday's announcement of the finalization of settlements for the three most significant lawsuits with a total out of pocket cash cost of only $1.3 million for the three combined is a very important development in that MIVA emerges with its large cash position ($25 million) still intact.

3) Miva's initiatives to build out consumer oriented destination web properties for more cost effective ways to generate web traffic seems to be gaining traction.
It appears that several MIVA initiatives to develop their own sources of traffic are gaining traction. The rise of "Spill.com" as indicated in the recent MIVA press release was a very encouraging indicator of the success of some of these initiatives and should build on the company's success with screensavers.com and weatherstudio.com in helping to cost effectively gain wider toolbar distribution.

4) Miva's ad network remains very valuable in spite of falling short of management's expectations in Q3. Though last year's feeding frenzy in the online advertising space seems to have subsided somewhat, there remains to be several large, well financed companies who are frequently rumored to be looking to buy their own ad network. The "build it or buy it" decision is typically discussed in terms of how long it would take to build it and how much it would cost to build a contextual advertising platform, market it to advertisers and publishers and gain the critical mass necessary to make it profitable. I have seen wide ranging estimates of as little as $100 million and 12 months to $250 million and two years. In either case, I believe some of those potential acquirers would find an existing network with a $100 million revenue run rate and a significant international presence to be easily preferable to even the low end of those "build it" projections.

Additionally, one of the biggest issues MIVA's ad network faced in Q3 was a decrease in the revenue per click that its advertisers paid for traffic. What if the Miva ad network were purchased by any one of the many large company's who have great web properties with plenty of traffic that they currently monetize using either Google or Yahoo's networks? Its highly probable that the MIVA network advertisers would be willing to pay higher rates per click (maybe even as much as they pay on Google or Yahoo's networks) if their ads would be shown across the many sites owned by the Interactive (Nasdaq: IACI) comglomerate - including Ask.com, CitySearch.com, RealEstate.com, ServiceMagic.com, etc.), the CNET network (Nasdaq: CNET) of websites, the Fox Interactive sites owned by News Corp. (NYSE: NWS-A) - including MySpace.com, WSJ.com, etc. or even ValueClick (Nasdaq: VCLK). It seems that an acquisition by such an acquiror who owns significant content that is already well trafficked could possibly be pay for itself in a very short time through the increase in revenue paid per click alone. In any case, its hard to imagine a scenario where MIVA's ad network is not worth something more than $100 million on its own.

5) Latent buy side interest represented by significant short position. In spite of these recent positive developments, there remains just under 1 million shares sold short. While that is not a huge short position, its is somewhat large when you consider that there are many days when less than 100,000 shares trade hands and also when you look at the recent trading in this stock and notice how even sub 10,000 share buys or sells can cause exaggerated moves in the stock price.

In summary, MIVA appears to be materially undervalued at current trading levels. With a net cash position of $25 million, an ad network that would be worth more than $100 million and a growing toolbar/direct segment that is growing rapidly and appears to be close to tipping the company back to profitability, one could reasonably argue for a market cap north of $150 million, which would equate to a market price of $4 - $4.50 per share.

Disclosure: Author is long MIVA.